I’ve faced many supply chain challenges in my career, but the one that really doesn’t get talked about enough is poor inventory control. This should be an obvious part of supply chain management, but the fact is, when products aren’t sold and can’t be sent back to the manufacturer, too many companies have absolutely no idea what to do with them. They end up gathering dust on a shelf, serving as an example of supply chain inefficiency and how poor planning can hamper profitability.
Most companies use either the FIFO (first in, first out) or LIFO (last in, first out) systems for inventory management. Both tools have their merits. Unfortunately, there is an inventory management approach that has no merit at all, and it’s running rampant. It’s called FISH: first in, still here.
Rather than clear out old inventory, business owners decide to hold on to products that eventually end up broken, missing or shrouded in dust. Yet, if you look at the books, those companies are carrying the original assessment of that obsolete inventory, which inflates their value well beyond what these organizations are reasonably worth.
One company I encountered had $100,000 of obsolescence in an inventory worth $300,000. When I asked the owner why he hadn’t sold the obsolete inventory to get it off the books and make a little bit of money, his answer demonstrated three fears most owners share about getting rid of FISH inventory:
- The company won’t get much for the obsolete inventory.
- Selling it would reduce equity in the company.
- A reduction in equity might cause problems with the bank.
I understand those fears, but they’re unfounded. Puffing up business value for the banks is nowhere near as effective a business strategy as getting what you can for obsolete inventory — and cleaning up your facility and your books in the process. If you have FISH inventory, here are some proven approaches to addressing the problem.
First, take your obsolete products — anything that hasn’t moved in a year — and sell them. Try a surplus inventory buyer or eBay. Then, moving forward, make it a priority to keep your inventory clean.
Second, resist the temptation to buy large quantities of products because it’s a better deal. If you only need 500 of something, don’t order 1,000. Whatever price breaks you receive on the front end will be lost when those 500 products you didn’t sell are crammed on a shelf somewhere.
Third, talk with your vendors about as-needed terms. If you’re using a component every week for the foreseeable future, contact the supplier and ask if they’ll carry the inventory and let you order the part as needed. If they agree, you’ve just improved your cash flow by reducing the size of your invoices.
Lastly, don’t be afraid to ask your customers for help. I once took this approach with a manufacturing plant that was deeply in debt. The company made products for a seasonal market and only shipped four months out of the year. The business was paying for labor, overhead and materials with credit from several banks, then paid down the lines when inventory was shipped. Bankers call these type of loans “evergreen” because they are never truly paid off.
I called an emergency meeting of all the buyers the manufacturer served. They were stunned when they saw the massive stock of inventory and discovered how much money the company was losing by carrying it. I asked them what they felt was a reasonable amount of profit, and we settled on a fair number. I then asked about their internal cost of funds, and we agreed that they would absorb half that number, and the manufacturer would absorb the other half. This arrangement enabled the organization to make a profit on all products in its inventory. Within the first month of shipping, the company had zero finished goods on its shelves and never faced FISH inventory again.
Robert T. Bethel has orchestrated 77 business turnarounds over the past 50 years. He is passionate about taking over struggling businesses and guiding them to profitability. Bethel may be contacted through his website, robertthomasbethel.com.
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