Slow-Moving Inventory: Reduction

Slow-moving and non-moving inventory can consume large amounts of capital, storage space, and often handling expense. So, why doesn't everyone just get rid of it and reallocate the capital, space and expense that it presently consumes?

We noted earlier that you have to address this problem on two fronts: (1) reduction — eliminating this excess inventory as much as possible, and (2) prevention — removing causes that quietly tend to replace it. Reduction is normally the immediate concern so we will examine this first.

Critical vs. Non-Critical Items

The very first step is to identify "critical" inventory from "non-critical" inventory in your list of slow-movers. If you have ever tried to do this, you will understand how this can often be the last step as well. The "everything (of ours) is critical" wails can block further action indefinitely.

Criticality is nearly always access-time dependent: that is, we must have it available within minutes of need, or we can manage if it can be here within 30 minutes (or whatever). An item can be critical if it takes a month to obtain and the need can tolerate only a day or two of access lead time.

Determining Criticality

One approach is to estimate the rough cost of not having the item available at its present stocking location. Is it simply a matter of a lost sale, or is a life at stake? For many items, criticality can be established quite easily: a life is critical, while a lost sale in most cases is not.

Another approach is to estimate the maximum access lead time that can be accepted (based on some legitimate reason). You may be supplying a just-in-time process that will shut down the whole process if the part is not available when needed. In other cases, a day or two of lead time may be quite acceptable.

These examples suggest a criticality metric based on some combination of stockout cost and maximum acceptable access time. An "ABC" criticality metric may be adequate.

Once you have separated out the clearly-critical slow-movers from the non-critical items, you can begin to tackle the problem of how to reduce the non-criticals inventory.

Obstacles to Reduction

Many of the obstacles you will encounter are real and substantial. Here are a few that we see time and again ...

We Can't Afford the Earnings Hit

Writing off inventory creates a charge to earnings. In many cases, this charge can be very large relative to earnings, making the write-off financially impractical. Better to simply leave it on the balance sheet as a (usually invisible) dead part of total inventory and wait for an opportunity to blow it out under cover of some unrelated event, such as a non-recurring, externally-caused earnings drop.

One solution is to write off small portions of such "dead" inventory routinely as earnings and opportunity allow. A bad earnings quarter may offer a chance to add a small additional charge. An unexpected profit increase may be another good time to absorb a relatively small write-off.

The key to success with this solution is to have the "dead" items marked so that they can be quickly selected for write-off and disposal. You have to do this well ahead so that you are ready for any write-off opportunity that may come up.

What If We Need It In Future?

Just-in-case (JIC) inventory is very common, especially for specialty items that have long lead times. But a JIC stocking rationale can easily become more a matter of end-user convenience than of any real necessity. Without routine attention, JIC stocks of convenience will eventually appear all over.

It is amazing how much duplication of this nature one that can find even in well-run organizations. Every point-of-use storage location typically has just-in-case quantities one or two units for dozens of items, which can add up to serious money in larger organizations.

These JIC items are by definition non-critical, since we have already separated the "criticals" out. But they may be required for other good reasons: They may be long-lead items that are a major hassle to get if not on hand. They may be part of a stocking commitment for an important customer. They may be truly hard-to-find items that are no longer in production. In each case, a determination has to be made based on the cost of holding¹ these items indefinitely vs. the cost of getting the item if and when needed.

This calculation can be rough but it can identify the many no-brainer cases where (discounted) stocking costs far exceed the likely cost of as-needed purchases.

¹ Holding costs include both inventory carrying costs and stock handling costs. The latter can easily outweigh the carrying costs for bulky, low-value items that have to be moved and counted with any frequency.

Resistance to Standardizing

Everybody is in favor of standardizing but nobody wants to apply it to themselves. There is nearly always a good rationale for why we need our preferred items.

Standardizing can be an especially effective way to reduce the number of slow-movers. If you have five "equivalent" products with demand for each of one unit per year, then standardizing on one of these brings the turnover to 5. Not great but better and you get to reduce the safety-plus-cycle stock required by as much as 4 units.

One approach to standardizing is to have the users agree on one generally acceptable product but to allow purchase of equivalents where a special need arises. This flexibility can help move users to the standard, which is always available, and away from "special need" alternatives that may not always be as readily available.

Customers Rely On Us

The old-time "hardware" store that stocked one of almost everything is probably a myth as well as being distant history. Customers will come to us, they reasoned, because we always have the item they were looking for. No wasted time shopping around — a good customer retention strategy.

Today, the internet takes care of many hard-to-find items in a reasonably quick and convenient manner. Customers can do this for themselves, or you can do it for them as part of your customer care practices.

Dealing with this objection to eliminating slow-movers may be done by surveying customers to find out whether they value you as a hard-to-find item source. You can then balance the cost of losing this incremental sales against the holding cost of the inventory involved.

Prevention Is Vital

Even if you are successful in eliminating all non-critical inventory, you can't stop there. This inventory is already rebuilding itself. So, we next look at slow-moving inventory prevention ... Next ...

 

 

Other Approaches

Reducing a large block of slow-moving stock typically requires routine efforts over an extended period of time and the use of a number of approaches. Here are a few more action ideas ...

• Try to consolidate as many local "just-in-case" (JIC) stocks as possible into a single, shared stocking location. This can reduce the required safety-and-cycle stock level.
• Rely where possible on vendor stocking and their expedited delivery services.
• Locate a similar, non-competing organization to see if common JIC items can be shared in some manner.
• Improve end-use demand forecasting. Poor demand forecasting is a major source of slow-moving inventory.
• Add an expense budget line item for inventory write-downs and write-offs and feed it monthly with small write-offs. Over time, this will absorb a substantial write-off while being invisible in reported earnings.

Some of these are discussed in more detail in the page on Prevention.

A Reduction Process

As you can see, reducing your slow-moving inventory cannot in general be done quickly. You have to chip away at it routinely.

This nearly always involves creating a process to address slow-movers monthly as part of other routine management chores. Attending to this "as time permits' or "every so often" is rarely successful.

We offer a few action suggestions here.