In every business there are hits and misses–hot selling goods or services and real dogs that nobody seems to want. Often, the difference between a businesses’ success or failure is the ability to distinguish between the two, and the courage to cut losses quickly by disposing of the doggies.
Because time is money, the key word is “quickly.” As a rule of thumb, we figure that the expense of maintaining goods in inventory averages about 2 percent of the cost of those goods each month. If you carry an item in stock on the shelves or in a warehouse for a year, you’re down 24 percent. There aren’t many businesses that can overcome this kind of a cost handicap even in the best of times. When business is bad, a slow moving inventory can be a killer.
For many business people, however, disposing of obsolete inventory is difficult because it means they have to admit making a mistake. Some have gone to the grave without making that admission.
One businesswoman who inherited a small gift shop in a resort area was surprised when she paid a visit to the store. The shelves were crammed with a lot of dingy looking merchandise that seemed to be priced far too low.
Upon closer inspection she discovered why. Based on the price tags, some of the goods had to have been sitting on those shelves for at least 15 years! But even at prices from the 1970s, this shopworn merchandise was no bargain. Indeed, much of the inventory was virtually unsalable.
She junked most of merchandise, sold what she could at a distress sale, and restocked the store with fresh inventory. Today the shop is a viable business again, and the owner has an iron-clad policy of getting rid of dogs. If an item doesn’t sell in six months, she cuts the price 40 percent and moves it out.
In some industries, it’s possible to work out arrangements with suppliers to limit your vulnerability to slow-selling inventories. An auto parts retailer established a relationship with a wholesaler that allowed the store to return any unsold merchandise for full credit within a year.
Unfortunately, however, the company’s warehouse manager failed to keep records necessary to establish the purchase date of merchandise in stock. In reviewing the businesses’ inventory the owner discovered thousands of dollars of old, obsolete parts sitting alongside new merchandise.
Had these old goods been identified in time, they could have been returned to the supplier in exchange for fresh merchandise. Instead, the retailer wound up disposing of them for a few cents on the dollar.