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:
Buy two $1,000 lots of fast-moving inventory from Deadstock Broker at 50% discount.
This represents a savings of $1,000
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.
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!!!
Repeat the above steps.