Nine Excess Inventory Management Mistakes

There is an article worth reading in the August 2013 issue of CFO.  The article by Gary C. Smith is titled:  

Nine Inventory Management Mistakes — and One Easy Solution.

The Nine Mistakes listed by the author are as follows:

1. Do nothing
2. Lease additional space
3. Liquidate it
4. Continue to sell it
5. Give it away locally
6. Sell it to your employees
7. Give it away to your employees
8. Sell it to your top accounts
9. Send it to a landfill

Mr. Smith advocates the Finance should consider a tenth option:

IRC Section 170(e)(3), a little-known section of the tax code, allows Regular C Corporations to donate excess inventory and receive an up to twice-cost federal tax deduction. Donating your excess inventory to a gifts-in-kind organization not only will significantly reduce your tax obligation, it will get your excess, non-selling products into the hands of qualified, deserving nonprofits across the country.

This, in our experience, only works for foods and other consumer goods.  It is hard to donate industrial widgets to churches and charitable groups.  It also presupposes that the Excess is not so excessive that donations would eat into sales at an unacceptable level. 

If Mr. Smith's suggestion appeals to you or your company, by all means read his very good article and consider his advice.  That is not the point of this blog.  We were impressed by his list of Nine Mistakes and want to comment on that.

We have written in this blog many times the most common reaction to Excess and Obsolete Inventory is #1:  Do Nothing.  We would rephrase it as

• Complain Loudly and Do Nothing
  OR
• Complain Loudly to the Supply Chain who is not empowered to do anything, hence Do Nothing.

Mistake #2, Lease Additional Space, is essentially the same as Mistake #1.  We would rephrase this as 

• Lease extra space because you have so much Excess and Obsolete Inventory, complain loudly about the Inventory Level and the rental of extra warehousing space, and continue to do nothing.

In our view, Mistakes 1 and 2 are essentially the same.

The second most popular mistake in our experience is #4:  Continue selling it.  This is folly when the product is truly obsolete or for some reason unsalable.  We have seen many a management team, however, insist on taking "just one more look" at how the product could be reconditioned and sold at nearly full margin.  

All of the other options are either not practical or not appealing to Finance.  The selling to employees or giving away of the product, cuts into sales and margins.  Therefore, it is easier to do nothing.  Liquidating or disposing of the Excess and Obsolete involves write-offs that come right off of the bottom line and thus are way less appealing than doing nothing.

Excess and Obsolete inventoryis only reduced when the management team truly wants to reduce it.  When this happens, they will create a team of sales, marketing, finance, and supply chain to determine the most cost effective way to reduce inventory.  The team needs and an inventory reduction target and a time deadline in which to achieve the reduction.  We would also advocate that the same team be tasked with:

1. Evaluating why the Excess and Obsolete came to be
2. Develop countermeasures to dampen the creation of Excess and Obsolete moving forward.
3. Implement a review and mitigation plan to deal with Excess and Obsolete on a quarterly basis before the levels become unwieldy.

We would love your input: 

• What mistake is most prevalent in your experience?
• Do you use Gift-in-Kind donations?
• What is the best practice you have seen for preventing the creation of and the management of Excess and Obsolete inventory?

Comments

[Sell excess Inventory]

Thanks for this very useful info you have provided us

[Sell electronic parts]

Great info

[Obsolete Inventory]

Great post! Been reading a lot about what to do with obsolete inventory. Thanks for sharing the info here!