The Challenge of Turning Dead Inventory
into Cash, Low Hanging Fruit,
Sludge and Everything Else

by Ted Hurlbut

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.

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, maybe a sidewalk sale, 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 ten 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, but Hail Mary’s rarely work. The solution 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. Stop the bleeding. There are many possible causes for the continual buildup of dead inventory. If you can identify the cause and fix it, do so. If you haven’t been able to, however (which is likely or you would have fixed it when dead inventory was a much smaller problem), it’s critical to recognize that fact clearly and soberly, and seek out the professional expertise that can help you stop the bleeding.



3. 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 their 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, they might have outlets that they can sell it to. Make clear that your request is a one-time thing, not a new standard operating procedure. Maybe the best they can do is offer markdown money, or an additional discount off your next purchase order. At a minimum that would help with cash flow.

4. Segment the 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.

5. 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 it out from all the rest, feature it, sign it, price it to move, and get your cash. 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.

6. Sludge. We all know intuitively what sludge is, it’s the bottom, the worst, the oldest, most shop-worn, most outdated, styles, colors and patterns. And when you see it mixed in with or displayed near the other dead inventory, it makes everything else look like sludge as well! So get it off the sales floor, away from the other dead inventory, and most importantly, away from you customers. The ugly truth, in fact, is that sludge has little or no market value. It doesn’t warrant 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 all of the other 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.

7. 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. As 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.

8. 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.

9. 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. 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. For larger items, such as furniture, it may be possible to feature this inventory in a dedicated closeout area or room.

10. Price it to move. Dead inventory is dead because it is not moving. It does little good to take the time and effort to segment it, feature it and sign it if you are not going to price it to move. Forget what you paid for it, and are carrying it 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.

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. Dead inventory 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.

© 2004 Ted Hurlbut

Ted Hurlbut is a retail consultant, coach and speaker who helps independent retailers increase sales, profitability and cash flow by leveraging his deep expertise in the core retail disciplines. To learn more about how you can benefit from Ted's proven retail know-how, visit his website at http://www.hurlbutassociates.com or download his report 'The 16 Essential Elements of a WINNING Independent Retail Strategy'.

 
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