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Inventory Management

Low Hanging Fruit, Sludge, and Everything Else

How to turn dead inventory into cash.

Originally published by

By Ted Hurlbut

Hurlbut & Associates

A recent conversation with a client reminded me of how much some small (and not-so-small) retailers struggle with dead inventory. My client related how, slowly, gradually, almost imperceptively over time, the percentage of dead inventory had grown. And as it was growing, the problem was thought to be modest, because the rate of growth appeared to be modest, so modest measures were taken to deal with it. An extra markdown here, a special promotion there, but still there seemed to be more of it this month than there was last. Finally, when the sheer amount of inventory involved became inescapable, and the realization came that the measures to deal with it weren't close to being sufficient, the whole thing started to feel overwhelming.

So if you're looking at a build up of dead inventory, and feel a little overwhelmed by the enormity of it, here are a few ideas to help you get started turning it into cash.

1. Patience and persistence. You didn't get into this situation overnight, and you're not going to get out of it overnight (Unless, of course, getting 10 cents on the dollar from a jobber or liquidator makes sense to you, which it may in extreme cases). Build ups of dead inventory are frequently accompanied by a cash flow crunch, so the instinct to search for a quick fix can be strong. The solution, however, rests with a persistent, sustained effort designed to deliver consistent, incremental results. The first and most important step is establishing reasonable, attainable expectations for what can be accomplished in any given period of time.
    
2. Can you return it? You never know until you ask. And if you ask firmly, and structure your request as a win/win proposition, most vendors will be reluctant to respond with a flat out "No." What do you have that your vendor might find valuable in return for its help? Your next purchase order perhaps. A test order on that new item or program your vendor has been after you to try. Maybe an increased share of your business. Open the dialogue, show your vendor the inventory you're sitting on, it might have outlets that it can sell it to. Make clear that your request is a one-time thing, not a new standard operating procedure. Maybe the best your vendor can do is offer markdown money, or an additional discount off your next purchase order. At a minimum, that would help with cash flow.
    
3. Segment your dead inventory. It is critical to recognize that dead inventory is made up of merchandise with dramatically different characteristics and market value. I recommend breaking your dead inventory into three categories, which I call (for no other reason than I think these are very descriptive terms) low hanging fruit, sludge, and everything else.
    
4. Low hanging fruit. This is the most desirable inventory, the most marketable, and the easiest to sell and turn into cash quickly. It's the quick win. Start here. Break out a style or item, feature it, sign it, price it to move now, and get your cash. When that style sells through, break out the next style or item. If you've been struggling with tight cash flow, this is like a tall cool drink on a hot summer day. Most importantly, if you feel like you've been losing the battle, it's nice to get a win and feel like you're finally making progress.
    
5. Sludge. We all know intuitively what sludge is: It's the bottom, the worst, the oldest, most shop-worn, most outdated. And it's toxic! When you see it mixed in with or merchandised near low hanging fruit, it makes that look like sludge as well! So get the sludge off the sales floor, away from the rest of your dead inventory, and most importantly, away from you customers. The ugly truth is that sludge has little or no market value. It doesn't merit the time and effort necessary to try to sell it. Think about donating it to charity. The resulting tax deduction is one tangible benefit you will receive; another benefit is that the rest of your dead inventory won't look quite so bad and will likely be more highly valued by your customers. In the end, if you can't find a charitable organization to donate your sludge to, donate it to your dumpster.
    
6. Everything else. Not as desirable as the low hanging fruit, or as toxic as the sludge, the rest of your dead inventory can be segmented yet again. After you sell through the low hanging fruit, slice off the next most desirable layer of inventory from this category, feature it, sign it, and price it to move. Understand that each successive layer of inventory is likely to require a greater discount to stimulate customer response. As you go along, in fact, the least desirable inventory in this category will likely start to look and feel more and more like sludge, which is a good sign that you're near the end of the process.
    
7. Selling dead inventory is not like running a clearance sale. Dead inventory is different than clearance merchandise; it's generally older and lacking a current demand. If you find with any layer of dead merchandise that customers aren't responding, pull it back and bring something else forward, then bring the first layer back forward at a later time at a greater discount. If you attempt to move it merely by taking an additional markdown without remerchandising it, as you might with clearance merchandise, you only reinforce in the customers mind that it may not be desirable even at that new, lower price.
    
8. Develop merchandising and selling strategies to minimize the impact on your regular business. The last thing you want your store to look like is that it's going out of business. You want to protect the brand integrity of your store. This is why a slow, steady approach works best, so that your dead inventory never represents more than a small piece of your overall offerings. For some retailers, it may be a small feature just off the front of the store, or perhaps a dedicated table or rack on a traffic aisle further back in the store.
    
9. Price it to be irresistible. Forget what you paid for it, or are carrying it on your books for. It's not relevant! Let me repeat this, because it's an easy point to get hung up on: Forget what you paid for it, it's not relevant; that was then, this is now! What is relevant now is the price your customers will pay for it, now! And like most everything else in retail, your customers will tell you very quickly whether you have it priced right or not.
    
10. And then there's eBay. EBay has emerged as a viable avenue for retailers to sell off dead inventory, but not everything necessarily lends itself to eBay. If you are sitting on highly identifiable, branded items with an established market position, even if those items appeal to a very specific customer, eBay may work for you. The typical eBay shopper is sophisticated and well informed. They are usually looking for something specific, down to a manufacturer's stock number. They understand the value of what they are looking for so you have to be priced sharply. It's an absolute must that you competitively shop similar items on eBay before you post your items there.

When you are confronted with a build up of dead inventory, it's critical to make a clear headed but realistic assessment of what it's going to take to move it through. It's losing market value every additional day it's sitting there. It represents cash that is likely needed for other critical business purposes, such as paying vendors, reducing debt, fleshing out assortments or stock levels of key items or categories, or opening additional stores. The time to get started is now.

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