Slow Moving and Obsolete Inventory
In many industries this is referred to simply as SLOB inventory. It's the opposite of an inventory shortage, it's too much inventory. Not just too much inventory, but too much of the wrong inventory that's losing value every day it sits dusty on your warehouse shelves.
Whether it's traditional methods or just in time(JIT), Inventory is at the heart of many manufacturing companies. It's often one of their biggest assets and yet biggest risk. They must make the right product at the right time to fill the demand while keeping their costs down. Buy raw materials in enough quantity to get the price breaks they need and yet not too much it becomes obsolete or ties up too much cash.
See if any of these issues sound familiar.
consumer preferences shift unexpectedly
Sometimes the finished goods your selling no longer matches customer needs or preferences. This isn’t something you can necessarily remedy, but it is something you can predict to some extent. This can be predicted through trend analysis of your sales married with market information. Market information can be attained in a simple way like having your salesforce canvas your customers or in a more sophisticated way like online forms or purchasing market insights from a company specializing in your field.
Poor sales projections
This was mentioned as a cause of running out of inventory, but it can also cause you to have too much or slow moving inventory. It’s also not about how relevant your product is to the marketplace, but instead about producing the right quantities of your products to match the market.
The more granular your analysis, the better you will be at projecting sales. For instance, if your sales forecast is created at the SKU level and you hold your sales team to specific sales goals by the SKU level you will have better luck getting numbers to plan your shop floor by well in advance of ever receiving the order. It's also helpful to study and know the natural business cycles within your product line. These are generally reports that can be created or ran from any ERP software such as Sage 50, Sage 100, Sage 500, or Sage X3.
Lead times for customers are too aggressive
There is a tension between the speed at which the plant can operate and the needs of the marketplace. If a plant runs slow and orders are large but infrequent (both terms are relative and subjective) then to keep certain customers satisfied the decision may be made to maintain high inventory levels. The higher the inventory and more infrequent the orders the higher the odds of getting stuck with obsolete inventory when the market has moved on. So two ways to fix this is to increase production capacity or renegotiate delivery terms with customers. The later usually requires substantially less investment.
Poor inventory tracking caused your organization to lose track
Maybe the bill of materials in your system is not accurate and you’re producing parts you never intended. Maybe it’s human error causing the issues because your warehouse team isn’t doing a good job of keeping inventory counts up to date when materials are converted or raw material is received. Whatever the reason, it’s important to identify what items this happens to and it can be accomplished by running sample testing from your inventory. Just run inventory reports weekly and check a few to see what’s accurate. If the same offender keeps popping up then examine why that happens. We suggest utilizing 5-Why analysis whenever there’s unsolved mysteries in a business.
No active inventory management efforts
Inventory management is just like any other aspect of your business. As the famous management consultant Peter Drucker is often quotes saying “What gets measured gets managed”. If you’re not measuring and managing your inventory at least monthly, your inventory is likely to get old, slow, then obsolete. Try keeping a Kanban. If your software doesn’t provide this feature it can be provided by either creating export queries from your database or running reports regularly and comparing them. There are plenty of online Kanban boards or excel templates to create this outside of your system. If you’re unfamiliar, Kanban is just a method of managing your inventory that balances demand with capacity in way that provides reorder points and new assembly points for your inventory.
Poor purchase terms with vendors
Sometimes inventory gets old because you’ve purchased too much trying to get lower prices or because you feel like the vendor is not dependable enough. This can be remedied by negotiating new terms with your current vendors and seeking vendors who are willing to provide better terms and is more dependable. Make sure you are doing a good job of rating your vendors so your purchasers can have readily available knowledge in advance of choosing where to place an order. The more empirical you can make purchase decisions, the better the decisions will become over time.