Not too long ago in an online antiques forum, a dealer posed this question to other dealers: “What do you consider dead inventory and what do you do with it?” It was a lively discussion, with 69 comments in the thread.
The forums definitions of dead inventory included:
- Stuff nobody wants
- Anything over 10 months old
- Anything over a year old
- Inventory that remains unsold way too long
Responses to “What do you do with it” included attempts to sell the inventory at:
- Flea markets
- Live auctions
- Yard sales
- Consignment shops
- Parking lot/sidewalk sales
Some dealers had no plan at all for dealing with dead inventory. One dealer admitted that she had reached a “tipping point” where half her inventory consisted of dead items. When most of one’s inventory is unsalable, profits plummet and customers begin to shop elsewhere. Unless a quick remedy is found, such shops face inevitable bankruptcy.
All retailers, regardless of their line of business, face dead inventory issues. The good news is that dead inventory can be dealt with effectively once one has discovered firm and fast answers to the original questions: What is dead inventory and what to you do with it?
What constitutes a suitable answer for one dealer will not be a suitable answer for another because everyone’s circumstances differ. But, all dealers need to consider certain concepts before coming up with their own solution to the dead inventory problem. Once they have devised a suitable formula for dealing with their issue, they should apply their solution consistently. Let’s begin by considering: What exactly is dead inventory?
Accountants will tell you that inventory is dead when it has not seen any sales for a set period of time (usually determined by the industry). For an accountant, the issue is black-and-white: If inventory has remained unsold for a specified period of time, it’s dead; get rid of it.
Entrepreneurs will tell you to never let an accountant run your business; whether inventory is dead or not is a gray area that is subject to interpretation. I agree with the entrepreneurial viewpoint. There’s more to the issue of dead inventory than clocking a sell-by date or calculating inventory turns (although an understanding of the connection between profits and inventory turns is essential).
Consider the “silent salesman” value of select dead inventory items. The experience that consumers share when coming into your store is called “shopping.” In order to shop, there must be a variety of products available for comparison. For example, if you have three Victorian lamps – priced high, medium, and low – chances are good that your high-priced model has been in stock for a while.
What your accountant doesn’t see is that your customers may have originally been drawn to the beauty of your high-priced lamp but they ultimately purchased the medium-priced lamp. The high-priced lamp was the bait that got the customer to stop and look, and they did what consumers usually do: They didn’t buy the cheapest one or the most expensive one; they bought the medium-priced one. Would you have gotten the sale without the “silent salesman,” the high-priced, dead-inventory lamp? Probably not. In this case, the high-priced lamp is a dead inventory item you’ll want to keep.
Consider also the marketing value of your dead inventory. The depth of your inventory makes a strong marketing statement to your customers; it tells them that you’re a viable enterprise with a lot to offer. No one likes to shop in an empty store. Some time ago, researcher David A. Matsa of the Kellogg School of Management at Northwestern University found that grocery stores that decided to pay off debt rather than invest in inventory ultimately hurt their bottom line. [Read Matsa’s research here.]
There was a direct correlation between the amount of inventory offered for sale and the stability of the store’s customer base. “It’s not just about making a sale, but it’s about having enough inventory so that customers come back in the future,” Matsa explained.
Of course, a store full of junk isn’t going to help your business, either. So the question dealers must ask before liquidating a dead inventory item is: “Does having this item help me sell other items?” If it does, keep it; if it doesn’t, get rid of it.
How does dead inventory accumulate? Like silt in a riverbed: a little bit at a time. But eventually, riverbed silt will build up to the point where it either becomes a dam or changes the course of the river. And, that’s exactly the effect dead inventory has on your business: It will either completely block the flow of profits or re-direct your store to the waiting gavel of an auctioneer.
Dead inventory issues are often rooted in dealers’ buying habits. Over-bidding at auctions and failure to research purchases are common buying failures. Before buying any inventory item, a dealer must know if there is a market for the item and what the item typically sells for.
If there is no market for the item you want to buy, you can still buy it if you want to, but realize that it is a risky purchase. Once a dealer knows how much an item brought at auction, he can determine his maximum bid or purchase price.
Dealers are often slow to respond as old inventory accumulates. Slow movers become dead items, and the dead items start to build up. Not wanting to throw away their investment, some dealers begin to play games with their dead inventory. They use colored stickers to indicate differing stages of “deadness.” They sort it into piles to deal with later. They move dead items to a special mark-down table. They swap last year’s dead items from the storage unit with this year’s dead items from the store hoping that the new look will make things sell.
None of that works. Unless you have a good reason to hold onto an item that hasn’t sold (silent salesman) simply choose an “expiration date” for each inventory item as you enter it into your inventory program (you do use an inventory tracking program, don’t you?). Don’t be vague about your answer. Set a date and stick with it.
Here’s what will happen when you start to eliminate the dead items from your inventory:
- You will have money to buy fresh inventory
- You will save money on taxes
- Customers will return
- Inventory will turn over faster
- You will become more profitable
Dead inventory is a like a cancer; ignore it and it will continue to eat away at your profits and cash flow until your business is dead. But, as any oncologist will tell you, the best cure for cancer is early detection and treatment. For now, you must be able to answer the question, “What do you consider dead inventory?”
In my next column, we will discuss common and uncommon ways to deal with dead inventory.
Wayne Jordan is a Virginia licensed auctioneer, certified personal property appraiser, and accredited business broker. He specializes in the valuation and liquidation of estate and business assets. His column Behind the Gavel appears monthly in Antique Trader. Learn more at www.waynejordanauctions.com, 276-730-5197 or firstname.lastname@example.org.