Dead Stock Strategies
Whether they're willing to admit it or not, each distributor likely has a dead stock "graveyard" inside his or her warehouse that contains numerous products that once had high expectations but since lost favor with customers or just never quite took off.
Dead stock, defined as product that has had zero sales in the last 12 months, is an annoyance for jan/san distributors. It affects their cash flow, takes up valuable warehouse space and freezes earnings that otherwise should be dedicated to the purchase of revenue-generating products.
"It's a cash flow killer," says Jennifer Rosenberg, president of Indianapolis-based Acorn Distributors Inc. "We make money by moving boxes, not by storing boxes."
Viewed as an out of sight, out of mind item by distributors, dead stock often slips through the cracks unnoticed for too long in many warehouses across the country. However, distributors who have taken the time to understand what the root causes of dead stock are, and have tailored their purchasing criteria and inventory tactics around eliminating it, have been able to limit dead inventory from eating away at their profitability.
Cause Of Death
Inventory doesn't just die over night. Distributors must know what its main causes are and how to fix it. Most times, dead inventory can be pinpointed to poor purchasing decisions.
It's difficult for distributors to avoid stacks of dead inventory if they don't have controls in place during the purchasing process. Often, the excitement to grow, expand into new territories and take on new product lines results in numerous items becoming dead stock.
Instead of making new purchases on gut feelings, distributors should structure decisions through a committee of managers that consist of input from the sales manager, purchasing manager, warehouse manager and controller. This group can then decide which items are best suited for their customer base, says Bill Weidmaier, president of Iowa-Des Moines Supply, Des Monies, Iowa.
"First we review the product, review the pricing and see what the advantages are over the current product we're carrying," he says.
Next, if it makes sense from a purchasing standpoint and a business standpoint, distributors can go to their sales force and talk an item through with them and get their input on what customers might think.
Depending on the category of the product, distributors can also take some of the product to their key customers to have them test it.
"If we get the customer's blessing then there's a good chance that we might make the change," says Weidmaier.
Even after a product review, there's still a chance products won't pan out with customers. So, before investing in new product, distributors must ensure that they are aligning themselves with vendors who can offer an insurance policy that states if a particular product doesn't sell, it can be returned at little or no cost.
"The first thing as part of your relationship with your vendor is there should be some sort of understanding of what happens to products that don't sell," says Howard Coleman, principal of MCA Associates, a Derby, Conn.-based consulting firm.
Without establishing prior agreements with vendors, distributors will find it difficult to return dead items.
Wholesalers are a great resource for purchasing specialty items or products requested by only a handful of customers. Manufacturers often have high order minimums and with only a few customers needing it, the rest turns to dead stock. Wholesalers allow distributors to buy a few products as they need.
"We do a lot of special ordering for customers," says Weidmaier. "[Wholesalers] allow us to keep our inventories low because we don't have to carry as many SKUs. Our larger volume products, we'll buy from manufacturers and the smaller volume items we buy from wholesalers. Wholesalers will deliver to us on a weekly basis so we don't have to carry more than two weeks worth of inventory. It allows us to keep our inventory levels down."
Poor Management Of Inventory
Without a doubt, poor management of inventory exacerbates the dead stock problem in distribution warehouses. When people aren't paying close attention to the movement of their inventory, dead stock occurs.
"You have to follow inventory very closely because it's substantial costs sitting out there in the warehouse," says Weidmaier. "We monitor it very closely and purchase accordingly."
Unfortunately, some distributors either don't have warehouse software to track inventory turns, or if they do, they still don't utilize it to it's maximum potential. In fact, Jason Bader, president of The Distribution Team, a Portland, Ore.-based consulting firm, says distributors must learn how to extract and manipulate data in their warehouse software program.
By using their system's inventory report function, distributors can determine when a product dies and track its profitability. Industry consultants suggest distributors run an inventory report every month looking for products that have not sold in the last 12 months. Items that fall under this category should be noted as dead.
These reports allow distributors to get ahead of the problem as well. It allows distributors to look for products that have sold once, twice or three times in the last year. Those items are the first signs of a product losing favor with customers. Thus, with this information, a distributor should immediately stop reordering and convert the poor-selling products to non-stock items, says Bader.
"The worst thing that can happen is someone comes in and buys product on your dead stock list and then you go and re-buy it," he says.
As items continue to lose favor with customers, the death toll rises and the whole cycle repeats itself. But even though yesterday's products may get overshadowed by newer items, distributors say there is still money to be made on dead stock.
New Life For Dead Stock
When dead stock is discovered, most distributors make a concentrated effort to move it out of their warehouse as quickly as possible.
"There's no reason to hold onto dead stock for a second longer than you have to," says Coleman. "The objective is to turn it into cash and just get it the heck out."
The longer dead product sits on warehouse racks, the more money is being lost. Find a way to recoup some of the money lost on these items. After all, dead stock is captive dollars that can be converted into spendable cash.
The most popular method of liquidating dead stock is to return the product to the vendor in which it was purchased from — granted not too much time has passed since it's original purchase date, and it doesn't violate the vendor's return policy.
"Vendors prefer to have it back as quickly as you can because the longer you hold onto a product, the better the chance they have to do some repackaging. Boxes get torn, it's dusty, it's dirty and that adds to their cost at that point," says Coleman. "The quicker you get it back, the better off."
Most vendors offer distributors options such as an outright return of goods for credit, or a dollar for dollar exchange. For example, if a distributor returns $5,000 worth of product, they have to buy $5,000 worth of good product in return. It's common for most vendors to tack on a restocking fee of 20 percent for returns.
Twenty percent sounds like a lot to swallow, but with the average carrying cost about 25 percent annually, each additional day that a distributor holds on to a dead item, it adds to that tally, says Bader. So, instead of having a diminishing dollar, he recommends distributors accept the 80 cents out of the dollar vendors offer for returned product and invest that in something that can eventually turn multiple times a year. Thus, the lost 20 percent is recovered in a few months.
If distributors don't have the option to return inventory, retrieving lost money can be accomplished by enticing sales employees with monetary incentives to clear out the unwanted product.
At Acorn Distributors, the company reduces the price of dead stock, then gets its salespeople involved, says Rosenberg.
For each sale, sales reps get 100 percent of the profit, rather than a percentage of the gross profit.
"So if something costs $10 and they sell it for $12, they're getting $2 on that," says Rosenberg.
Salespeople can move even more dead stock by pairing it with a good selling product. For example, if a distributor has a large quantity of squeegees they are trying to liquidate, they can pair them with the appropriate window-cleaning product and sell the package as a bundle.
"One of the best ways to move a substantial amount of dead stock is to bundle it with top-selling product," says Bader.
Give sales reps a printout of all dead stock items. When making sales, they can try and sell customers dead stock items that complement the items they are purchasing in a bundle.
Some argue, however, that using salespeople to push dead stock items may not necessarily be the best route.
"Salespeople really don't want to talk to customers about dead items," says Coleman. "They want to talk about more exciting products or the new products, stuff that actually sells."
If salespeople resist, an alternative is to appoint one person — a retiree or college intern works well — as a dead stock manager, whose sole responsibility is to get rid of dead stock. Enticing these employees to sell dead stock items is often accomplished by giving them 10 percent of the revenue recovered.
Because most distributors appoint someone who already wears many hats in their company to oversee dead stock, most times it gets overlooked or pushed to the back burner. Those who have brought on someone specifically to manage their dead stock, Bader says, have seen phenomenal results.
Selling To The Masses
If existing customers aren't interested in dead stock, try reaching out to the public by hosting a yard sale or open house.
At West Springfield, Mass.-based Greenough Packaging & Maintenance Supplies, the company holds an inventory clearance sale in conjunction with a yearly agricultural fair. Because the fair grounds are located across the street from its warehouse, the company uses it as a way to get rid of some of its consumable items to the fairgoers, says Craig Cassanelli, president.
Distributors with walk-in storefronts are also able to entice walk-in customers by designating a clearance item area that is comprised of dead stock items. Even if the product doesn't sell immediately, at least the dead stock is no longer taking up space for another possible revenue-generating item.
If distributors can't hold these clearance events on-site, they can list items online. Online auction sites are an easy and effective way to generate revenue from dead stock.
Swapping dead items with other distributors across the country also proves worthwhile. In fact, when it comes to dead stock, most distributors say one man's trash is another man's treasure.
Distributors can produce a catalog of their dead stock and send it out in an e-mail blast to other distributors outside of their geographical areas. Baiting distributors by offering them free freight on the products often proves to be effective, says Bader.
"Just because it's dead in your market, doesn't necessarily mean it's dead across the country," he says.
If a distributor belongs to a buying group, most groups already have online portals, which distributors can use to trade dead stock with other distributors across the country.
When all else fails, some distributors as a last resort will donate the product to charitable organizations and take a tax write-off.
Dead stock is an on-going problem in warehouses across the country. Finding ways to move unwanted stock and manage to make a profit at the same time can be extremely beneficial for distributors. After all, more products will continue to flood the market and kick the old ones to the curb.