Give Your Inventory the Box Dust Test.

Reprinted from SEMA News magazine, October 2004

by Jon Hedges

Manufacturers, retailers, and wholesalers, you have a job to do right now—shape up your inventory for 2005. The time to start is right now, and just to eliminate any possible excuse there's a way you can analyze your inventory using just one finger.

Right now's a great time to get started. The SEMA Show is next month and that means it's time for the industry's annual ritual of introducing new products. Plus, the busy season's winding down for a lot of companies, so there's more time to do it.

Inventory management is a big job, so let's break this down into projects to do over the next several months and keep it simple.

October: Analysis Month

Devote the month of October to inventory analysis. This is where your finger plays a key role.

Many SEMA-member companies have invested in information systems to improve data collection and analysis but still have slow moving or obsolete inventory. In fact, a Northwood University study published in 2003 (available for download from SEMA.org) showed that nearly half the jobbers, distributors and manufacturers surveyed agreed that they had a significant amount of obsolete inventory. That same study also showed that manufacturers introduce four times as many products as they discontinue each year.

Since the industry doesn't grow by four times each year, this means there's a lot of stuff sitting around, gathering dust. It's time to start an analysis to find out how much slow moving inventory—the inventory that gathers dust—you have in the warehouse.

Even if you don't have sophisticated data available, you can use that dust to help your analysis. Go out to your warehouse and find the dustiest boxes out there. These are probably the parts that have been sitting around the longest. Wipe your finger through the dust and find the worst offenders. Congratulations, you just completed Phase One.

For those of you with more data at your fingertips, run a report to see year-to-date sales on all your SKUs. Go straight to the bottom of the list and you might find dozens, possibly hundreds, of SKUs that only make up a few thousand dollars in sales.

Someone in your company may have an emotional attachment to this stuff, but it isn't doing anything to improve your profitability.

There's another part of this analysis, and that's figuring out how this stuff got here in the first place.

Many SEMA-member companies know they need to do a better job forecasting. There are a number of things that can be done, from creating a simple file in Excel to buying expensive forecasting software. The most effective forecasting tends to be simple, because more people can understand it, and it tends to involve Sales, Marketing and Manufacturing (or Operations) working together as a group.

Working as a group is a critical piece of the puzzle. In many cases Sales and Marketing people aren't fully aware of things like raw material lead times or lot sizes, and Manufacturing or Operations people aren't fully aware of what it takes for Sales and Marketing to be able to tell them how many parts they have to produce or buy.

Another critical component is communication up and down the supply chain. Manufacturers would love to have more sales and forecasting information from WDs. Working together will help reduce dead inventory and improve lead times. Make October the month where you start collaborating with your supply chain.

Fix your forecasting now, because if you don't you'll just have more dead inventory to deal with next year at this time.

SEMA Show: Find New Products

If it's the first week of November, it must be time for the SEMA Show.

New products are the growth engine for our industry. Make it your goal to spend as much time necessary at the show to find the new products that will grow your business in 2005. With this inventory analysis you're going to be opening up shelf space and freeing up cash to bring those new products in.

If you spend most of the first week of November in Las Vegas , that leaves three weeks in November to figure out what to do with the inventory that you targeted in October.

Wander out to your warehouse and find those boxes with the dust and finger marks. Still there? Thought so.

November and December: Move it Out

Make it your goal by the end of the calendar year to get rid of all the inventory that is sitting around gathering dust.

Now we have to deal with some major obstacles. This is the time when a lot of managers are tempted to give it one more try. Don't forget, if your customers wanted this stuff, they probably would have bought it by now. So, you either have to force-feed it to your customer base with lower prices, or you have to find new customers interested in buying it.

If you're going to force feed it to your customer base, you don't have many choices other than to sell it on price. Mark it down aggressively, and you may need to keep lowering the price to get rid of it.

Slashing the price may be the easiest decision to make to deal with this inventory at this point. After all, if you've already had it for several years and it hasn't gone anywhere, and you have the chance to generate some cash from it, do you really care if you sell it at cost or below?

Another possibility is to sell it to new customers through new channels. You can try selling it through eBay, or there are SEMA-member companies that specialize in selling obsolete or overstock merchandise.

January: Bring in the New

January can be your month to wrap up your new product plans. Review your notes from the SEMA Show and verify shipping dates of new products.

To make sure you don't go through this again, set up a process to periodically analyze your inventory. Be proactive to eliminate slow moving products in the future.

If you spent the time in October to improve forecasting as a team, and improve communication with your supply chain, you should also be more prepared this coming busy season.

Work to keep your inventory dust-free.