In every industry, the goal is to continue growing. Stagnation or lack of growth is often viewed almost as badly as regressing. With growth being such a vital metric that businesses live or die by, inventory should be viewed as a potential limiting factor to growth. When reviewing inventory and conducting inventory audits the focus is on the hot ticket items and fast movers. Why pay for storage of slow-moving or obsolete inventory when those resources could be utilized to store faster-moving inventory? The first question when looking at auditing your inventory is how to identify slow-moving inventory to then replace it with faster-moving inventory. Below are 4 ways of identifying slow-moving inventory:
1. Inventory Turnover
Turnover rate measures how quickly products are moving from the warehouse or storage to your customers. A high turnover rate means that demand for the product is high – it is not held or stored very long before it is sold. A low turnover rate means that a product is being stored for a long period of time before being sold. In a nutshell, inventory turnover shows how much a company has sold and replenished inventory over a specified length of time.
Investopedia states that the formula for identifying inventory turnover is as follows:
Inventory Turnover = Sales / Average Inventory
Low turnover indicates excess inventory, while high turnover may indicate strong sales or insufficient inventory.
2. Holding Costs
Holding costs is the total cost it takes to store your inventory. Warehousing costs are often the first cost that comes to mind, but other costs should be considered such as depreciation, insurance, staffing, and any other costs associated with the inventory. Continuing to use capital towards supporting inventory should only continue if the gross profit is greater than the holding cost of the inventory. Inefficiencies may still exist, even if a profit is being made. If other higher-demanded inventory exists, resources should be used to support the faster inventory and no new resources should be invested into the older inventory.
3. Days Sales of Inventory (DSI)
Days Sales of inventory is described by Investopedia as “a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.” Investopedia gives the following formula for DSI:
DSI = (Average Inventory / Cost of Goods Sold) * 365 Days
As DSI is the inverse of Inventory Turnover, a high DSI value means lower turnover and a low DSI value indicates higher turnover. DSI will give you an average number of days it takes for a company to sell the inventory being measured.
Forecasting is a technique that uses past data to make estimates of the direction of future trends for a business. Forecasting can be used to discover patterns or predict future inventory turnover. Using forecasting to predict the demand and turnover rate is helpful for a business in discovering future products that may become slow-moving or estimate the usable life-span of their inventory.
Once slow-moving and obsolete inventory is identified, the next question is what should be done with it? Often companies will scrap their slow-moving inventory so they can get a small sum of capital as they bring in larger quantities of faster-moving or new inventory. For heavy equipment/highway truck manufacturers (or any industry where your inventory consists of spare parts for your previous products), scrapping can create distrust with your customers. As parts are scrapped, the supply of spare parts is diminished; which increases the price of remaining spare parts. For more information on the negative effects caused by scrapping inventory, check out our article “How Scrapping Inventory Can Damage Brand Loyalty.”
Lippert Enterprises provides an alternative to scrapping inventory that keeps brand loyalty and inventory availability high, while simultaneously accomplishing a company’s inventory reduction goals. Selling your inventory to Lippert provides your business immediate capital (more than what scrapping would provide) while keeping the inventory available to your customers.