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Nine Inventory Management Mistakes—and One Easy Solution

By Gary C. Smith |   2014 | 9 | 2

Managing excess inventory is a challenge for supply chain and operations management professionals in even the most efficient organizations. Overage issues can drain profitability and take focus away from core priorities and operational objectives. When faced with excess inventory, many companies try the following common—though misguided—strategies:

1. Do nothing. It’s easy to put off decisions about what to do with slow-moving inventory. But time, and the inevitable accumulation of inventory, will take its toll. And at year-end, the company will pay in the form of increased taxes.

2. Lease additional space. The overage may be out of sight, but by leasing additional warehouse space, all that’s being accomplished is increasing the bottom lines of storage and logistics companies. 

3. Liquidate it. Selling excess inventory at a dime or pennies on the dollar may lead to those very same products ending up in other markets—meaning, the business will actually be competing against itself. Liquidation also can lead to strained customer relationships as the liquidated inventory cuts into their sales and profit margins. The business’s own sales department won’t be pleased, either.

4. Continue selling it. As Albert Einstein is reported to have said, the definition of insanity is doing the same thing over and over again and expecting different results. If sales have tapered off on certain products, why would they pick up again at a later date? Don’t hang on to outdated and stale merchandise. Instead, move on to newer, more attractive, and likely more profitable product lines.

5. Give it away locally. Giving away small amounts of product locally might help the company’s community outreach efforts, but it also might reduce sales and get people used to the idea that they can expect the same in the future. Suggesting that company leaders and staff members get involved on local boards, volunteer for special events, or help local charities raise funds might be better strategies. 

6. Sell it to employees. Although employee discounts are common and can be nice perks, this Band-Aid approach will only mildly—and temporarily—reduce inventory levels.

7. Give it away to employees. Any organization that allows staff members to take home moderate amounts of product should expect to see those items showing up on eBay the very next day.

8. Sell it to top accounts. Similar to local giveaways, frequently discounting product for existing buyers will motivate them to wait for the next price reduction instead of purchasing at full price.

9. Send it to a landfill. Assuming the product is ultimately destroyed and doesn’t wind up on the secondary market, trashing merchandise is unmistakably a wasteful strategy.

Luckily, there’s an easy alternative to these ill-advised approaches, and it’s a solution that enables supply chain and operations professionals to turn a problem such as excess inventory into a positive. IRC Section 170(e)(3), a little-known part of the tax code, permits Regular C Corporations to donate excess inventory and receive an up-to-twice-cost federal tax deduction.

Donating excess inventory to a gifts-in-kind organization will not only significantly reduce tax obligation, but also get the excess, non-selling products into the hands of qualified, deserving nonprofits across the country. In addition, provisions in the tax code stipulate that donated items cannot be resold, bartered, or traded and must be used in a manner consistent with the charity’s mission. This means the donating business and other company leaders will rest easier knowing that the product won’t find its way back to the open market.

Gary C. Smith is the president of the National Association for the Exchange of Industrial Resources. He may be contacted at donor@naeir.org.

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