With end of year fast approaching, now is a great time to take a hard look at your inventory and reduce the number of items you are carrying. We are talking a permanent reduction in your products, not just trading a hot seller for a slow one.
First, remember that every $100,000 you keep in inventory has a holding cost of about $10,000 per year. You have to finance it (or lose the interest you could be earning), clean it, count it and reconcile it! Second, research tells us that companies that reduce product offerings make more money. Why? It’s not just the inventory cost — reducing the number of your product offerings frees up valuable staff time to better market the other products.
Now the argument against product reduction is always one of “we’ll lose the one customer that is buying that product.” That may be so, but it’s also highly likely that by the time you weigh all the costs of keeping that product in your line, the costs are higher than the margin you earn when that one customer finally buys that product.
Let’s take for example a particular brand of cigarettes in a c-store. Five times per week, Joe Customer comes into your
store and purchases a certain pack of smokes (that you carry just for him) and a cup of coffee. Now add up what you make on 5 packs of smokes and 5 cups of coffee. Not much! Now compare that with the cost of keeping that extra brand just for him. It just doesn’t pencil out.
For those marketers in the lubes business, you can also find yourself with way too many different products. Do you really need to carry a certain 10-40 oil in all those different package sizes? Likely not!
So, what you need to do is to take a very practical and tough approach to your products. For most companies, reducing your product count by 10% would be a good starting goal. Yes, that means that you will eliminate one out of every ten products you currently sell. (Once you do that, you’ll be so pleased with the results that you knock another 10% off for a total 20% reduction!)
In the ideal world, you’d have an item-by-item inventory turn report where you could print out your slowest turning items and just remove the top 10% of the products from that list. Since we’re not in the ideal world, and you may not have the ability to get such a list from your system, you will have to rely on the knowledge of your staff.
Your payables clerk and inventory reconciliation person should be part of the team, but on the retail side, remember to include store managers in the process and on the wholesale side, your customer service representative. Commercial sales staffs usually have too much bias to be valuable to the process at this point. Unfortunately, it is in their best interest to have everything for everybody in the warehouse!
Using the best data and people you have, generate a list of potential product reductions and before you stop stocking them, get that list out to your stores and commercial personnel so they can approve and/or comment on your suggested deletions. You want to give your folks the opportunity to veto any item, but you must be convinced of the product’s economic value.
Next, consider your clearance strategy for the discontinued products. Ideally, you want to accelerate their deletion from your inventory, which means you want to quickly sell what you’ve currently got. Again, enlist the help of your staff for their ideas. Consider a clearance sale, returning the goods to the supplier if you can get full credit, or selling the goods to another marketer. In the case of lubes, there is a good on-line exchange available through FuelQUEST.com. You can list what you want to get rid of as well as hunt for bargains on products you need.
Also, early in this process, make sure you don’t order more of the products you are trying to discontinue. Many marketers operate with replenishment or “build to” ordering systems. If you don’t change your order process, you’ll end up buying more of the goods you are trying to get rid of!
If you use this product reduction strategy, you will immediately see a substantial boost in your cash flow. Conservatively from experience we estimate an increase in cash of 10% of you total pre-reduction inventory, plus an extra 10% of that savings from the holding cost reduction. So if your inventory is running $500,000, figure on $50,000 plus another $5,000 for a total of $55,000 in cash or a total 11% savings.
Your final task is to concentrate your effort on more effectively marketing the remaining 80% of your original products. For retailers, this means a serious look at your merchandising. You may want to take your 11% inventory savings and invest those dollars in new displays or rack systems. There are several merchandising consultants that can come onsite, inspect your stores, and give you solid recommendations for boosting sales and margins.
For wholesalers, you may want to take a portion of your savings and reinvest those dollars into sales training and a good prospect management system. One of the best in the business is DEI, actively promoted by more than a few refiners. Most sales managers hate it when they first hear about it because it stresses accountability, but love it when they start seeing the results.
So, get busy, enjoy the extra cash flow, and then multiple it by putting it to good use!