The Secret Cost of Excess Inventory

Let's face it, problem inventory is just a part of business. No one's exempt. No one's above it. No one's free from dealing with its ugly head rearing up from time to time. It just happens. Dead stock, surplus, and problem inventory happen. Problem inventory could really be any inventory that exceeds the optimal axis of supply and demand. But for the sake of this article we will define problem inventory as this: "Any inventory that is at or near the end of its life cycle and has not seen sales or movement for a set time determined by the industry."

Sometimes also known as:

• Surplus Inventory
• Excess Inventory
• Dead Stock
• MOS, or marked out of stock
• Salvage
• Customer Returns
• Closeouts
• Liquidations
• Warehouse Damages

Call it what you will, but if you're sitting on goods that are taking up space and costing you money instead of making you money, then it's a problem. How much of a problem is what we're going to talk about in this article and hopefully find some reasonable solutions as well.

In case you're not sure about what to do with your surplus inventory, or how to get rid of it, or if you're even ready to let it go, let me enlighten you a bit.

Warehouse Space

The average cost of warehouse space in the United States is $5/ sq. ft. Depending on how much warehouse space your inventory is taking up and how long you've had it, your cost to simply house this merchandise could be much more than you think. Not only is that inventory costing you warehouse space directly, but think of how much it's costing you by default for the value of other possible goods that you aren't housing. Your precious and limited space is being tied up right now like a prisoner to your inventory that's not even bringing in a profit. Now we're talking about indirect costs as well.

Managing and Maintaining

I want you to also consider for a moment the cost to manage and maintain that merchandise. Don't you have someone watching over those goods and keeping them safe? Security personnel? Insurance fees? Management? Staff? It starts to add up fairly quickly, doesn't it?

Interest

What about interest on those goods? Did you pay for them outright in cash? Chances are you didn't, which means that interest is accruing on those goods as well. And since they're not selling or bringing in any kind of revenue, it is stealing the profits from your other productive inventories. At what point will you begin to pay it off and with what monies? That's right. The vicious cycle is going to just continue until you finally cut the cord. It's like they're on life support right now. With no chance of recovery. I hate to paint such a grim picture but the truth is that your problem inventory is sucking the life out of your business. And chances are it's sucking the life out of you too.

Emotional

This is another cost that is hard to measure, but what is it costing you emotionally to hang on to that inventory for dear life? It's like any destructive relationship, the quicker you get out the better. The longer you wait to get out of this relationship, the more it costs you. Not only financially, but emotionally, psychologically, and even relationally. Just get out.

Depreciation

Let's look at another factor most people never consider. The longer you sit on those goods, the more value they're losing. So if there is any value in them through secondary means of distribution, for example a reverse logistics or liquidation company, even it is slipping away. Someone is going to have to buy those goods and even with a discount retailer there is still a certain expectation of quality and fashion. The longer you wait to finally make a decision, the more value they're losing.

Opportunity Costs

And finally and most importantly, the one measure that is hardest to equate, but nonetheless just as tangible as anything, the opportunity costs of having your money tied up and not available for other investments. First of all without the money on the books, you're very unlikely to even be looking for additional opportunities, so even if they were available you wouldn't be looking for them. Second, even if you found them you don't have the room or the capital to invest because of your problem inventory. However, since we can't measure the opportunity loss, since we don't know for certain what opportunities we're missing out on, there's really no way of knowing exactly how much this element is actually costing us. But we can know for certain that it is definitely costing us.

Let's recap...How many ways is your dead stock costing you?

• Cost of warehouse space
• Cost of interest
• Cost of managing and securing those goods
• Cost of insurance
• Cost of emotional, psychological, and relational wear
• Cost of decay
• Cost of lost opportunities

All in all dead stock is a business killer. It stifles productivity, it stifles production, it stifles the entire business from top to bottom. It's like a cancer. In order for your company to keep moving forward and to maintain good health, you must keep the inventory moving freely. The freer the inventory moves the healthier we are. The less it moves, the greater the risk of diseases and other life-threatening maladies.

Now think about if you were investing all of that energy in a positive direction instead of a negative one. How powerful would that be? Take all of your negative momentum and make one incremental shift in your focus, and you could change your business and your life forever.