Excess, Slow Moving Inventory

There are not Stages of Deadness
By Scott Stratman
Founder – The Distribution Team
 
  
Over the past 20 some years of working with distributors, one thing I have found in common with every single one is the existence of dead stock.  It is nothing to brag about, but there are some distributors who work with more dead stock than live inventory.  There are some who think it is dead and forget about it.  Then there are those who like to keep their dead stock around for years on end, almost to the point that it becomes part of the family.
 
I tell distributors all the time that there are not stages of deadness.  In other words, inventory does not go through stages like dying, dead, really dead and then stinky dead!  If it is dead then it is dead.  Make something happen.  Many distributors believe in the stages of deadness.  They think it might be dead with a heartbeat so maybe we can revive it.  We often believe that if we hit our dead stock with some electronic charge (like a sales promotion), it will pop up off the table and start living again.  This is not true.
 
One of the major reasons so many distributors have larger quantities of dead stock than they would like is because they do not have a rule of dead stock.  I challenge all distributors to establish a company dead stock rule or definition.  When I ask distributors their definition of when something becomes dead, I hear no sales in ninety days, no sales in six months and no sales in twelve months as common answers.  Those actually sound wonderful if you ask me.  But then let’s add a dose of realism to those answers.  In other words, what is really happening in their operations?  What I find as the truer definitions are something like no sales in twelve months, no sales in twenty four months, no sales in five years.  I even hear that some distributors use the rainbow method of identifying dead stock.  This is not a commonly known method, but too often it is applied.  The rainbow method is used by distributors who do annual physical inventories and put colored inventory stickers on the product once it is counted.  Each year they use a different colored sticker. When all the colors of the rainbow have been applied to a product, they deem it dead.  Hey at least it is a visual method of knowing what is dead.
 
I admit, the rainbow method is a terrible approach for anyone, but it is still being used today.  Now let’s look at some more practical ways to handle the dead stock you have in your inventory.  Let’s step back and look at a company definition that you can really live with and implement.  I would contest that no sales in six months is a great strategy but too hard for many to implement.  Find a definition and rule that most of your inventory can live with and most your people can execute.  Let’s use the no sales in twelve months as a realistic rule. 
 
Using this approach, you can easily run a report at the beginning of every month and look at those items with no sales in the previous twelve months.  I call it the “13th month first day report”, or “your inventory obituary”.  In other words, using this approach allows you to easily identify which products died last night (the last day of the previous month).  In an article we published years ago, I thought it would be a great idea if all your dead stock would start stinking as soon as it died.  Then you could just walk in the vault the first of the month and smell your way to the dead stock.  For some distributors, the first day of each month might be pretty stinky.  But since most of the hard goods we deal with do not stink all by themselves, we need a report to help make them smell up the place.  The “13th month first day report” is just that.  It will quickly list out all items that have had no sales in the past twelve months.  This list needs immediate attention.  If we do nothing, another thirty days will pass and more dead stock will pile up.  Having said that, what do you think is the worst thing that can happen on the first day of the thirteenth month?  Yep you guessed it, we sell one! I say that is the worst because you know you will have someone come up and tell you something like “See I told you if we kept this stuff long enough someone would buy some!”  It can only get worse when we think that it is now alive, and we go buy more of it.  I hate to be the bearer of bad news.  If it is dead, according to our definition, then it is dead forever.  Now take action.
 
Similar to when a human dies, the mortician works on us immediately because we start to decay and smell bad.  Your dead inventory will only cause infection to your good inventory if you do not act immediately.  Once identified as dead, you should make the appropriate adjustments to your accounting system.  You should also adjust all ordering controls in your software such that no one can buy anymore of it.  You might want to consider moving it out of the good inventory because if you don’t, you might know it died on paper, but you may not be able to find it in your vault.
 
I see a number of distributors who actually have created an inventory graveyard for their dead stock.  They identified it as being dead, moved it out of the living inventory and set it in a predetermined location.  Some have even decorated the graveyard with dark colors and the grim reaper standing guard.  Why would they do something like this you might ask?  Well, many distributors will take the dead stock and move it higher up on the shelves, maybe to the top shelf to get it out of the way.  You just compounded the problem.  You not only have dead stock, but you just implored the age old rule of “out of sight out of mind”.  Putting it out of the way, and out of sight, only makes your dead stock “deader”.  Ok, maybe it becomes more dead, but in any event, you will not keep it in focus if it is out of view.  Remember there are not stages of deadness!
 
Once identified as dead, and moved out from the good and living inventory, you can work on it more actively.  You see it all the time and your daily efforts will be more focused on moving it out.  By the way, don’t kid yourself, once inventory has died there is only one action item left – move it!  The goal is to make it go away or disappear from your inventory.  There are plenty of ways o make that happen and we will talk about those in our next article.  However, at this point some distributors have plenty to do after reading this.  Let me outline the steps you need to take when your inventory had died to eliminate any confusion:
 
1)  Establish a company wide dead stock rule – and follow it.
2)  Print out your inventory obituary on the first of every month
3)  Make the appropriate cost adjustments or write downs in your accounting system
4)  Pull it out of your good and living inventory
5)  Adjust your purchasing controls such that no one can buy more of something that has    
     already died once.
6)  Establish a dead stock area or cemetery in your vault so everyone can see what died.
7)  Do not push it up to the top shelves and use the “out of sight out of mind” strategy.
8)  Appoint someone to start dealing with it on the 1st of the month – a dead stock manager.
9)  Don’t ignore it, because in another 30 days something else might be dead, and you do not want to use the “rainbow method” of inventory management. 
10)  Do whatever it takes to make this stuff disappear!
 
Remember, there are not stages of deadness when it comes to inventory.  When something is dead, take action before it starts to stink.  It is when you do nothing, or you become too emotional about disposing it, that you end up spending many more hard earned dollars.  If you take the easy way out when it comes to dead stock, you will soon need a full time dead stock manager just to deal with the mess you created.  So if you don’t have a rule of dead stock today, establish one soon, because the 1st of the next month is just around the corner. 

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