Culling the Dregs: Actively Manage Excess & Obsolete Inventory
Written By: James Snyder
No matter the state of the economy or a company’s particular financial position, there is always some amount of inventory that fails to live up to projected sales figures.
How your organization chooses to address this common problem can mean the difference between an effective pivot toward more profitable operations and being bogged down by the costs and broader implications excess and obsolete (E&O) inventory poses.
Understanding the problem of E&O
E&O has wide-ranging impacts on profitability and operational effectiveness:
● Financial statements are negatively influenced by the need to maintain reserves to offset losses when selling items below cost or otherwise disposing of them.
● Funds tied up in non-productive and stagnant inventory ties up capital that can’t be invested elsewhere.
● Warehouse space and resources are allocated to inventory that is declining in value.
There isn’t a single solution for the problems caused by E&O, nor is there one best practice to apply in all situations where such inventory is present. Companies have to identify their E&O, evaluate their options and then assess the results of those efforts. Connected planning software solutions, like Anaplan, can provide significant insight and analysis to drive actions in these situations.
Clear identification of E&O sets the stage for meaningful action
Understanding exactly what qualifies as E&O allows for far greater insight and stronger management of this type of inventory. Setting internal rules for categorizing E&O is a prudent and early step needed for effective mitigation.
Think of establishing rules in terms of grading the quality of your inventory investment. Rules may segment inventory based on a combination of forecasted vs. actual sales, the amount of inventory in the warehouses or sales channels, expectation of cost recovery as well as other relevant factors.
When setting rules, it’s crucial to take a detailed approach. Businesses with several sales channels, as well as a network of brick-and-mortar locations, can find that inventory qualifies as excess in some locations but not in others.
Identifying excess at the network level should be followed by a location-by-location assessment. Keeping track of this crucial difference can lead to more effective and cost-efficient responses. Excess in a portion of the network may simply be moved to locations where it can sell or listed in an online sales channel to right-size the inventory position. In cases where inventory doesn’t meet sales expectations across all locations, a global approach is warranted.
Evaluating options for reducing and eliminating E&O
There are several approaches to consider for reducing E&O. Below are a few options to consider. Review each of them carefully drawing on the specifics of your organization.
Discount and sell internally
E&O can be made more attractive to consumers at a lower price point. Depending on the sales channels available to your company, it’s possible to tap into new groups of potential customers by making E&O available for online sales at a discount. Businesses that have outlet stores and similar discount locations can move E&O to these facilities as well.
Sell to a third party
Another distributor or retailer may find E&O attractive due to their own network of customers, whether it’s individuals or other businesses. This is especially true when the inventory is offered at a discount. While this is not always an option, it is fast and effective when available.
Destroy the product
While this option removes the possibility of recouping any additional part of the funds spent on E&O, it helps protect future price position, avoids cannibalization against full-price products and quickly creates more room in storage facilities.
These options should be weighed for individual groups of E&O, based on a few key factors:
● Propensity for eventual sale.
● The revenue generated from those possible sales.
● The costs associated with continuing to house and transport inventory.
Running various scenarios to test your options can offer additional, valuable insight when making decisions.
Weigh short-term actions vs. long-term considerations
Before executing any policy to address E&O you must consider the long-term impacts. While it may make sense to move inventory off of the balance sheet quickly and convert to cash, you need to also consider the impact to your brand. There needs to be a balanced approach with E&O that considers not only short-term needs for cash driven by the finance organization, but also the broader impacts to your market and price position. At the extreme, a failed E&O strategy will lead to price position and ostracization of your customer base.
Analyzing the results
Validating outcomes is critical for better management and reduction of E&O in the future. An analysis can reveal if discounting led to a better cost recovery on such products, as well as if cannibalization of full-priced products occurred. Validating the effectiveness of E&O actions against the longer term risk to price and market position is critical to the health of your enterprise. It is not enough to focus on short-term results, you must measure the longer-term implications.
How Anaplan can help
The right tools for managing E&O empower decision-makers with data and analysis, allowing them to confidently make the best possible decision in each circumstance.
Anaplan’s connected planning solutions empower businesses to construct E&O models quickly and reliably. These models can offer greater detail of and insight into a number of important considerations. These include:
● Monitoring and evaluating risk exposure.
● Identifying specific pools of inventory to take action.
● Determining the best option amongst various scenarios.
● Measuring and validating the outcomes of those actions.
Allitix is your Anaplan partner
At Allitix, we’re dedicated to helping our partners improve business performance. We inspire positive change by equipping partners with the tools they need for strong connected planning and the knowledge necessary to leverage those tools to their fullest extent.
As an Anaplan Gold Partner, we’ve proven our knowledge and experience with this valuable and versatile connected planning solution. We can help your business address a number of core supply chain concerns, from E&O to sales and operations planning, demand forecasting, price analysis, category management and much more. To learn more about our commitment to helping our partners succeed, get in touch with us today.