Three steps to deal with unproductive stock and their booster - Data V Tech

Three Steps to Deal with Unproductive Stock & their Booster

According to Epicor’s findings in 2020, dead inventory makes up 10 to 30 percent of distributors’ stock on average. Thus, those businesses probably lose around 50,000-150,000 USD for every 500,000 USD in inventory. More severely, storage, labor, utilities, and insurance costs can add to such a loss. Besides, distributors might also suffer from dying, excess, or any other unyielding stock. The longer those parts stay in the warehouse, the more significant risks businesses will probably face. So how to avoid such unproductive stock disasters and boost your performance?

Unproductive Stock and their Possible Negative Impacts on Business

Unproductive stock includes all unprofitable items, e.g.:

  • dead inventory: those occupying your warehouse for quite a period
  • dying inventory: those losing their position in the market and moving toward dead inventory
  • excess inventory: those involving a large volume of an item
  • and any other inefficient stock

In addition to the costs mentioned in the introduction, distributors also have to bear, e.g., product transportation to the warehouse, utilities, depreciation, decay, and damage. A side effect of such item redundancy is that inventory managers might have to take much more time to navigate and locate the right ordered items. Meanwhile, creating a product mix strategy or applicable discounts to eliminate the stock at issue would be more challenging. As a result, you might lose the market share to a more agile, innovative competitor.

3 Steps every Experienced Inventory Manager Knows

Documenting in detail and systematically your inventory is excellent. Yet, distributors need to turn such data into valuable insights that can back up the operations to win the game. Here are the three steps to consider:

1. Determine your Metric to Identify your Unproductive Items

Let’s check these three metrics: turns, turn and earn, or gross margin return on investment (GMROI). And let’s consider this example of item X with the annual sales of 100,000 USD, cost of goods sold (COGS) of 80,000 USD, and an average inventory of 20% to make it easier to understand.

Turns: You measure the number of times selling or turning the average inventory. That is COGS divided by the average inventory over a given period. Thus, ‘turns’ is also the number of opportunities you had at the winning margin. In the case at hand, X’s number of turns is 80,000/20,000=4. In other words, the relevant distributor had four opportunities to earn margin on the inventory investment in item X.

Turn and earn: This figure is the number of turns multiplied by the gross margin percentage. It helps balance turns and gross margin. Continue with the case of X: The respected turn and earn would be 0.20*4=0.80.

GMROI: You can calculate GMROI by dividing gross margin dollars by average inventory. Looking at the example again:

  • Average inventory is 20%*100,000=20,000USD
  • X’s GMROI = 20,000/20,000 = 1

Comparing these figures of various inventory items, you could identify the underperforming ones. Thus, the more accurate data you maintain, the more thorough and valuable analysis you conduct.

2. Identify Underperforming Items

An accurate database is of great importance to this step. A well-documented sales history helps inventory managers estimate the average period to define dead inventory.

The most straightforward approach is to rank items with zero sales (dead inventory). Whether the comparison should base on a period of three, six, nine, or twelve months might vary.

Next, you need to check other items’ metrics. Those that have experienced a downward trend are possibly dying. You might also review the number of unique customers purchasing the items. The smaller it is, the higher the possibility that the items will soon become obsolete is.

The evaluation of excess inventory is also debatable. I.e., how much is ‘excess’? So, again, you must select the most appropriate metric(s) for your business by testing them through the history of your purchasing process. Meanwhile, the chosen method should not result in more work if possible.

Finally, other unproductive items usually have low margins. As a result, they lead to low turn and earn or GMROI. Perhaps many competitors also sell those items. Maybe they are so essential to a product line or another product that the lack of such items in stock would negatively impact your business performance. You have also likely set the price too low since the product introduction.

3. Develop Strategies to Manage Unproductive Stock

After categorizing the inventories, it is time to set up a strategy to deal with them. Each requires a different approach due to multiple factors, such as its characteristics.

Certainly, distributors should offload their dead stock as soon as possible. Here are some prevalent practices found by Epicor’s experts:

  • deep discounts
  • list of promotional items published on your website, eBay, or any relevant e-Commerce platform
  • email marketing or outbound calling targeted at former purchasers of those items
  • donation to enjoy a tax break

Both dying inventory and excess stock require promotional and marketing efforts to convince the customers to purchase before they change their preferences. It might be better to sell out the dying items rather than let them turn into dead stock. Meanwhile, the insights into excess inventory, especially the distributor’s purchase history, can help inventory managers learn from the past purchasing cycles and make better estimations in the future.

There are two approaches to deal with other unproductive items. If the low margin is appropriate, pinpoint those items to save time in future analysis. If it is the other case, it is recommendable to review the item’s pricing structure and take necessary actions accordingly.

Inventory Optimization - Epicor Kinetic (ERP)

Epicor Kinetic (ERP) facilitates any novice’s entry into the product management field and enhances the practices of those that have mastered the three steps above. Its built-in inventory management software eases complicated calculations and minimizes pertinent errors. The software also reduces inventory managers’ intense pain in tracking information when the data of thousands of inventory stock-keeping units (SKUs) continuously piles up. Likewise, they can focus more energy on developing strategies to improve cash flow and future purchasing decisions.

To conclude, inventory managers can offload unproductive stock using a detailed, accurate record of their purchasing activities and following these steps:

1. Determine your Metric to Identify your Unproductive Items

2. Identify Underperforming Items

3. Develop Strategies or Steps to Deal with Unproductive Stock

More importantly, they can use Epicor Kinetic (ERP) to eliminate headaches due to excessive data mass and boost calculation accuracy. Meanwhile, distributors can augment customer satisfaction by fast-tracking the navigation of the ordered items. As a result, they can improve their balance sheet.

Content writer: Trang Vu

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Data V Tech is Epicor’s Authorized Partner with over 20 years of experience in the Asia Pacific. We provide well-timed implementation with full support for software localization. As a one-stop shop, we offer complete solutions for manufacturing, trading, and distribution businesses, from mobile applications to e-commerce and direct machine data integrations to Epicor Kinetic (ERP) software.

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