A dreaded term in the fulfillment industry is inventory write-off. It is the formal recognition that some of a company’s inventory no longer has value and cannot be sold. Sometimes inventory write-offs are inevitable—for example if items go out of style and need to be reworked or recycled for another purpose. Other times, a product gets damaged in the warehouse, either during storage or transportation, and is no longer sellable. If write-offs happen occasionally, it won’t cause a huge loss to your organization. However, if they happen frequently, it indicates that your company has poor inventory management. Here are some important tips on how to prevent and reduce inventory write-offs with a proper inventory management system in place.
Utilize Inventory Management Software
The right inventory management software will provide metrics and reports that match your needs—whether that is needing to move unsold products, meeting a sudden and unexpected demand in sales, or re-calculating your inventory after making a mistake. Having accurate inventory levels is crucial, and your software should enable a consistent reporting system to keep track. . One example of inventory management software is ERP, or Enterprise Resource Planning. ERP is used to manage business activities such as accounting, purchasing, and supply chain management operations.
It’s also important to get comfortable using electronic data interchange (EDI), which any good 3PL will provide. EDI allows all partners in the supply chain access to the same real-time information. Sharing information in an electronic format cuts down on administrative time and confusion, and allows changes to be made quickly when needed. For example, the manufacturers you work with will gain the ability to share a variety of transactional information with the vendors, suppliers, and brands all at once.
“The DCL customer portal eFactory is extraordinary to say the least. One of the most integrated, comprehensive, and user friendly 3PL order and inventory management tools I’ve seen! Now on a very nice mobile app as well.”
Eliminate Obsolete Stock
Do you have stock sitting at the back of your warehouse taking up space in your facility? Is it being kept there because no customers want to purchase it or because your employees are uninterested in organizing it? If stock has been taking up space in your warehouse for a long period of time you need to find a way to rid your warehouse of it. Finding a way to deal with these items will result in good long-term financial results. Some options include selling the items at a significant discount to your customers, offering it as an add-on when a customer purchases another product of yours, or taking the items back to your manufacturer for recycling or reworking the raw materials
Avoid Excess Purchasing
It’s easy to get excited and manufacture a large quantity of products to sell, but if you don’t carefully measure your expectations, you could end up with dead stock that isn’t selling or that you need to sell at a discount just to get your customers interested. Every business must know how much inventory is required for each ordering season and ensure that they do not carry too little or too much stock. When inventory sits in your warehouse it ties up funds and raises your storage costs. This can inevitably lead to write-offs if you cannot move that inventory soon enough. Monitoring your inventory records accurately through software can help you avoid this mistake. You can look at the history of your orders to make informed purchasing decisions.
Step Up Replenishment Intervals
This technique is relatively simple to implement. Review your inventory management data and calculate how much stock you need to keep orders moving out the doors without short-stocking. Then reduce that number by increasing the frequency of replenishment intervals to prevent short stocks though there is less inventory on hand. It is simple and can be incredibly effective.
The reason some companies in your industry are successful is because they have efficient inventory management. Implementing an inventory management system (IMS) can help you identify the root cause of slow-moving inventory and find ways to reduce excess and obsolete stock. Inventory management also helps you sell off excess and obsolete stock more effectively through the process of write-downs. By reducing the price of an item, you can still make a profit. But failing to find a way to utilize obsolete stock will lead to a write-off where the product is considered a loss to your company.
Revise the Order Cycle Regularly
Another option to prevent inventory write-offs is to simply order in smaller batches and cycles. Smaller and more frequent order quantities means you store less inventory in your warehouse. As long as you have sufficient inventory to meet customer demand and prepare for peak seasons, you will be on the right track. However, before you can do this you must understand what your order frequency history is. You also need to consider if there will be any loss of transportation efficiencies if you reduce your batches, and how it will impact the labor workload at distribution centers. Once you determine your order frequency, these answers will present themselves, but you must have a thorough understanding of your supply chain costs and capabilities before switching to this strategy.
Some options for implementing this strategy include the following:
- Re-evaluating cost of holding inventory
- Reducing setup time and costs
- Understanding cost trade-offs of labor, transportation, and inventory
- Understanding warehouse storage procedures
Minimizing Inventory Write-Offs With a 3PL
In a traditional supply chain the upstream activities of purchasing and manufacturing are disconnected from actual demand for the product. This is a chief cause of inventory write-offs, as sales and demand aren’t feeding back into purchasing decisions.
A third-party logistics provider (3PL), on the other hand, integrates with your sales and distribution processes as well as upstream purchasing and manufacturing. This makes the supply chain more agile and responsive, and minimizes inventory build-up. A good 3PL will allow you to set reorder points, so inventory is ordered automatically in the right amounts to meet demand when you need it most.
Getting a better understanding of your products and how they move throughout the supply chain is vital to effectively running an ecommerce company. Each item needs to be tracked and measured to see how customers respond to it and how high or low demand is. When items you hold lose their value, the write-offs will be deducted from your reserve, but you don’t want this to become a habit. With the help of a third-party logistics provider, you can have the professionals handle the time-consuming process of inventory management, so you can focus on building and fortifying relationships with your customers.
Help with inventory management is one of the many benefits to working with a 3PL. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.
Tags: KPIs & Metrics