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February 7, 2006 How to Reduce Dead Inventory When I discuss with my investment counselor why he keeps cash in my portfolio he tells me “just in case” we need to move quickly or have an emergency we should have cash assets available. On the other hand if we have too much cash our assets aren’t working to their fullest potential for us. This is an excellent way to look at inventory stocks. We need to carry enough inventory (cash) for customer demand and fulfillment, but as soon it becomes “dead” inventory it becomes non working cash. When that dead stock never gets sold unlike holding cash you lose the investment gain and the principal. This is where the analogy breaks down and costs you more $’s. I don’t know about your finances, but I know mine can’t handle that very long. Let’s look at Jon’s review of inventory by “risk factor” much like we do our investments. Least Risk These items are almost sure to sell. For example: New Items with a Firm Customer Commitment - that is, a signed customer purchase order to buy the entire quantity that you must bring into inventory. Yes, there is a chance that the customer will go out of business, cancel the order, or return the material for credit, but most customers who are willing to sign a purchase order are intent on using the product. Non-Stock Products with Recurring Sales - These are non-stock products that are continually sold to one or more customers. After you've ordered them several times in one year to fill existing customer orders, you may decide that it would be more economical for you, and more convenient for your customer, to keep several pieces in stock. Moderate Risk There is a greater chance that these new stock items will eventually become dead inventory. Salesperson and customer "suggestions" represent the most common type of moderate risk item. Has a salesperson ever burst into your office and exclaimed, "These would sell like hotcakes if we only had them on the shelf"? This salesperson's excitement is reflected in a common sales pattern for new stock items:
Substantial Risk What type of new stock item is often at the greatest risk of becoming dead inventory? Products that your vendor suggests you carry! Your vendor's salesperson arrives at your office carrying an armload of glossy brochures. He shows you sales projections showing that a new item will take off and provide you with a wonderful opportunity to increase your profits or market share. Unfortunately, the new inventory may not be the cure-all portrayed in the fancy graphs. The best way to reduce the chance of vendor-recommended items becoming dead inventory is to negotiate the return, at no charge, of any unsold portion of the initial stock shipment. When you add new items to inventory, you're investing part of your company's limited assets in the hope of gaining new sales and increasing profitability. Each new product addition should be made only after careful analysis, and the performance of every item should be reviewed on a regular basis. KNOW YOUR RISKS AND SAVE $$$ To Unsubscribe
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