What is Excess Inventory
Some retail store owners may consider all of their inventory 'important'. However, they might keep items on the shelf much longer than what economically makes sense, in hopes that one day they will sell it at full price. This way of thinking is not necessarily a bad one, it just isn't in the owners best interest as far as cash flow and inventory turn go.
"Within some organizations—for example, retail—it may be appropriate to achieve quick wins, such as immediately removing any slow moving inventory from your store. The revenue that these items generate compared to the expense of holding and managing them does not warrant maintaining them." –InboundLogistics.com
When talking about excess or old inventory we are referring to select items of inventory that are slower to move than the rest of your products.
Years ago computing powers were at a minimum and systems being developed only focused on fast moving, money making, items. The 'slow movers' were put on the back burners for the time being.
Now that technology has substantially increased it is easier to identify select inventory that is slower to move and also quantify the amount of money it is tying up.
What is defined as slow moving inventory will vary from store to store, and item to item. You as the store owner should have a general idea of the products that are losing you money. A couple ways to check for excess inventory could be the classic look-around-the-store assessment and/or do some research in your POS system.
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Calculating your inventory turnover ratio can help you get an idea of which items are reducing your cash flows and accounting for unnecessary carrying cost. This is normally done on a storewide level but the same equation can work on individual products as well.
To do this you take your cost of goods sold and divide it by your average inventory. An easy way to calculate your average inventory is take the beginning inventory cost added with the ending inventory cost and then divide that by two. The higher the ratio the better the performance.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Example: The first half of 2015 (Jan through June) you sold 6,000 items throughout your store. Each item cost you on average $8 to purchase from the vendor. Your cost of goods sold would be $48,000. January 1st your inventory for the entire store totaled $18,500 and at the end of June your inventory was totaled to be $11,300. Your average inventory is [(18,500 + 11,300) / 2} $14,900.
Inventory Turnover Ratio = 48,000 / 14,900 = 3.22
This retailer sold their inventory approximately three times during the six months.
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Pay attention to your frequency of shipments. If there is still a sizeable amount left on the shelf and you go 90 days (days vary between retailers) without a shipment of a select sku(s), then you are probably coming down with a bad case of excess inventory.
Thankfully BoxFox is here to help cure your inventory headache. The best part is - it's free to upload a spreadsheet and we only charge a 5% fee once your deal goes through.
Some independent owners may be hesitant to admit they have excess inventory. They want to think they are doing well and running a successful business. Where this might be the case, it is okay to recognize you have a couple of weak spots in your inventory management.
No store is perfect. Identifying these and taking actions to correct this problem can be your next step in creating a more profitable business.