Businesses today are concentrating on reducing
costs, increasing efficiency and of course, maximizing profits. Often this
results in people concentrating on ‘buying smart’, being ‘lean’ or other
such terms floating around today. In reality one of the largest hidden costs
is in so-called dead inventory.
We all know the ‘associated’ costs with dead inventory, such as interest
lost and warehousing fees. Few people take into account the other factors
involved with dead inventory dollars.
Say a business has a dead inventory
of $1,000,000. The typical point of view is that with a warehousing fee
of about 4% and an interest rate of 7% their cost over the year is 11% or
$110,000.
In actuality the costs associated with this so-called dead inventory
actually total up as follows…
Warehousing Costs: 4%
Interest Cost:
7%
+
Expected profit margin: 25% x
Industry Standard Turns per Year:
4 = 100%
Cost of Dead Stock = 111% per year
!!!!
The costs that should be associated with dead inventory are huge. Not only
dead inventory falls under this calculation, but inventory in excess of
1 years’ supply is subject to this incurred cost as well. Overstock and
dead stock are killers. Let’s try and get these down and put the money back
into the company.
Consider the case of a distributor who has
an average inventory value of $800,000. Let’s assume that 10% of that is
non-moving inventory. Most distributors believe that inventory carrying
costs are in the 30% range.
If this is the case, the cost of carrying that
$80,000 of dead inventory is $24,000. This is an unnecessary cost that reduces
the distributor’s net profit before taxes by $24,000. If the net profit
of this distributor is 3% of sales, what amount of sales must be generated
to offset this $24,000?
The sales increase necessary to generate $24,000
at 3% net, is a staggering $800,000! Which do you think is easier for this
distributor to achieve - a 10% reduction in inventory, or an extra $800,000
in sales? Each exercise has the same effect of putting $24,000 profit into
the business.
Next, let’s look at ways to make it painless
to do the write downs necessary to clear this excess inventory:
- Step 1:
Buy two $1,000 lots of fast-moving inventory from Deadstock Broker at
50% discount.
This represents a savings of $1,000
- Step 2:
Sell one $1,000 lot of your dead inventory at 75% discount.
This represents
a loss of $750 on this step, but still a net gain of $250.00, when combined
with step one.
- Step 3:
Realize that you have exchanged your one lot of useless inventory for
two lots of fast-moving inventory and have an extra $250.00 cash as
well!!!
- Step 4:
Repeat the above steps.
