Let me begin by sharing my experiences around ‘inventory management’ from my graduate school days. I was still new to cooking. Often, I would try to make a favorite dish, and it would come out all wrong. I am talking about an inedible, unsalvageable, totally unsatisfactory outcome from my efforts.
Depending on how long it took to get to this outcome, my reaction would be different.
- It is unredeemable – I tossed it.
- I put a lot into the preparation (or I made a lot of it expecting a great outcome). In these cases, I would typically put it in the fridge. Over time, I would go through moving it around to make space for other “experiments”. Maybe first to the back of the fridge, then to the lower shelves, below eye level. Truth be told, I would even try it out a couple of times as if being in the fridge would have made it any better. Of course, this “unused inventory” eventually spoiled and got pitched.
I see a version of this in supply chains. A product may have inventory, but no demand. This could be for many reasons.
- Technology has moved on making the inventory non-saleable.
- Some new environmental laws might have outlawed some ingredients in the product.
- Customers might have moved on to something better out there.
- The demand is intermittent and (for some) unforecastable.
Now this inventory is just as worthless as the result of my cooking described earlier. But I see companies wanting to keep this inventory on the books hoping that something good will happen. Sometimes that is not the end of it. In extremely rare cases, one may see more supply coming in, whether via manufacturing or purchasing.
Inventory is carried on the books as an asset. That, combined with the hope that one will make something of the dire situation leads to keeping the inventory around. Inventory managers will try and see if the situation can be salvaged via:
- Converting to something else.
- Substituting for some other product.
- Swapping with a competitor.
- Returning to the supplier.
Sometimes though, none of these are acceptable. And unfortunately, unlike a fine wine, inventory does not improve with age.
It helps to remember that carrying inventory incurs rent + room + risk costs. If one is faced with this situation, the only real solution is to write the inventory off. At the very least, one would free up the space and no longer incur costs on room and risk.
Interested in learning more about inventory management? Watch our on-demand webinar to discover 3 must-have features of inventory planning software.