Slow-moving stock lines should be effectively managed, in both up and down cycles

“One of the critical operational issues in most businesses is effective management of stock levels, and particularly the slower moving lines” says Andy Bryant, spokesperson for Chester Finance Group, providers of trade, bridging and equity finance. “Many companies experience problems when they are holding high levels of stock and demand for that specific product then falls or there is a general economic slowdown. We saw this in the 2008/09 recession when businesses simply could not move their stocks, and some were left with items that became outdated or obsolete.”

Bryant says that during positive economic times companies keep their stocks at high levels. “The high demand stock items move quickly. When certain lines turn frequently and overall profits are pleasing, there tends to be less focus on the slow turning stock items. Because the holding costs of such items can be easily absorbed in buoyant conditions, management will ignore the problem lines when times are good.”

In contrast, when demand starts to slow, companies reduce inventory orders from their suppliers and begin to run down stock levels in anticipation of slower future sales. The overall stock turn ratio starts to come down and slow moving stock then begins to creep up as a percentage of total stock. Unfortunately only then does it begin to attract management attention.

Bryant says that by the time management begins to focus on the slow moving stock component of inventory, in order to improve struggling operational cash flows, market conditions have further exacerbated the high supply/low demand imbalance. “It then becomes even more difficult to move stock which was already slow moving during strong growth periods.”

Slow moving stock can be problematic to a business in several respects. Depending on its nature, it may quickly become technologically obsolete, expiry dates may have passed or are close, manufacturers’ guarantees may have expired, or fashions/trends may have changed. For imported goods, a further risk is that exchange rates may move against the business since the slow moving product was first purchased – and those same goods can now be imported at a lower cost than previously was the case. A recent example was the enthusiastic importing of generators and uninterruptible power supplies when the R/$ was around nine to one. Distributors and retailers were left with high inventory levels as fears of power cuts dissipated - and since then the Rand has strengthened significantly, making these products much cheaper to import.

Bryant says that stock management can sometimes become emotional. “A tendency of ‘hoarding’ can cause an irrational need to hold on to stock ‘just in case’ trends change again and the items can then be sold. Personal pride can also get in the way. Companies need to employ effective and objective strategies in order to avoid excessive slow-moving stock levels.”

One way is to closely manage key inventory ratios and their trends over time, for both overall inventories and for specific categories/product lines. For example, purchases as a percentage of sales will indicate when stock levels are becoming excessive.

Modern and sophisticated stock management systems are also important. Bryant says that a small business that is owner-managed may be able to use a ‘home-grown’ system and get by on ‘gut feel’ for a while. “However, as the business grows it becomes imperative to switch to a professional fully integrated stock management system. Such a system should provide real-time information on all stock lines, locations, minimum and maximum stock levels (based on historical sales), average margins etc. A good stock management system will also facilitate regular and easy stock counts and reconciliations.”

Bryant says that despite a company’s best efforts, slow moving stock is an inevitable part of doing business. “Management needs to adopt a practical and sensible approach and dispose of such items at a lower price. Drawing on the tested proverb of ‘a bird in the hand is worth two in the bush’, R100 from a sale now is more useful than the prospect of R110 in the future.”

A good stock management strategy may also include liaising with suppliers and determining whether the particular product is perhaps selling well in other parts of the country or elsewhere in the world, which could mean considering export markets. Another strategy could require enlisting the help of competitors and bartering/swopping stock, as they may need what your business is sitting with, and they may have what your business currently needs. Where possible and cost effective, products should be re-engineered to better suit current market conditions.

Bryant says that companies should constantly and actively be seeking out channels for disposing of slow-moving products – and ideally before they reach a point where the situation is grim and even loss-making.