Slow Moving Inventory: Everything You Need to Know in 2023
In this article, we explore what slow moving inventory is. We will also share with you our step-by-step process on how to manage it. Read on to learn more.
What Is Slow Moving Inventory?
Slow-moving inventory refers to items that have a prolonged shelf life due to lower demand, ultimately resulting in a tie-up of capital and storage space. These items typically remain in stock for an extended period of time.
Example: In January 2023, the electronics retailer "Tech Gadget Hub" purchased 5,000 units of the "X-Tab Elite" tablet. By December, they had only sold 1,500, leaving 3,500 units as slow-moving inventory. This unsold stock ties up capital and consumes valuable shelf space.
Key Methods for Identifying Slow Moving Inventory
The following are some key methods to easily identify slow-moving inventory:
Inventory Turnover Ratio (ITR)
Formula: ITR = Cost of Goods Sold (COGS) / Average Inventory
The Inventory Turnover Ratio measures how often a business sells and replaces its inventory within a specific period, typically a year. A lower ratio indicates that inventory is moving more slowly, suggesting it may be slow-moving or at risk of becoming deadstock.
Days Sales of Inventory (DSI)
Formula: DSI = Number of Days in Period ÷ Inventory Turnover Ratio
DSI provides an average of the number of days it takes for a company to sell its entire inventory. A higher DSI suggests that inventory is sitting longer before being sold, pointing towards potential slow-moving items.
By tracking the age of individual inventory items, businesses can identify products that have been in stock for longer than usual. Implementing a system that categorizes inventory based on its age (e.g., 30 days, 60 days, 90+ days) can highlight items that are at risk of becoming stagnant.
5 Steps to Optimize Slow Moving Inventory
Managing and reducing slow-moving inventory is critical for optimizing costs and ensuring effective inventory turnover. Here's our simple step-by-step framework on how to do it:
Step 1: Assess and Adjust Pricing
Products not selling rapidly may be priced too high or not promoted enough. Reducing the price or offering deals can stimulate demand.
Example: "Book Nook" discovers 200 hardcover titles that haven't sold in two months. They slash their prices by 30% and as a result, they sell 150 of those titles in just one week.
Step 2: Conduct Regular Inventory Checks
A periodic review of inventory helps in spotting items that linger longer than anticipated. With this data, businesses can make informed decisions on how to promote or reposition these products.
Example: At the end of each month, "FashionFits" analyzes their stock and notices that 300 dresses of a specific design haven't been selling. They then decide to showcase them at the storefront, resulting in a 50% sales increase for that design the following month.
Step 3: Reassess Product Lines
If certain products consistently underperform, it's wise to consider reducing their stock and emphasizing others. This ensures that shelf space is dedicated to items with higher turnover rates.
Example: "ElectroHub," an electronics shop, observes that their monthly sales of DVD players have dwindled to just 10 units, while streaming devices sell 200 units. They then decide to stock fewer DVD players and double their streaming device inventory.
Step 4: Host Clearance Events
Clearance sales target products that need to be moved quickly, often due to upcoming new stock or changing seasons. By offering these items at a significant discount, businesses can accelerate their sales.
Example: "FurniNest," a furniture store, has 50 couches from an older collection occupying valuable showroom space. They organize a weekend "Flash Sale," offering those couches at a 40% discount, which leads to the sale of 40 units in just two days.
Step 5: Engage in Collaborative Promotions and Partnerships
Pairing slow-moving items with popular products or collaborating with complementary businesses can help move stagnant stock. Joint promotions can create a win-win situation for both parties involved.
Example: "BrewBean Haven," a coffee shop with an overstock of 500 bags of a special flavored coffee bean, partners with "Muffin Marvels," a local bakery. "Muffin Marvels" offers a free muffin with every purchase of the coffee beans from "BrewBean Haven," resulting in the sale of 300 bags in a week.
Let’s consider an example. "ElectroFusion" is facing declining sales and increased storage costs. They recognize the need to address its growing slow-moving inventory.
Here's how they implemented our step-by-step process:
Step 1: Assessing and Adjusting Pricing
ElectroFusion notices its overstock of 1,000 VR headsets priced at $300 each. The company decides to offer a 25% discount, reducing the price to $225.
Step 2: Conducting Regular Inventory Checks
In their bi-monthly stock reviews, ElectroFusion identifies 500 wireless headphones that haven't seen significant sales movement. They decide to promote them in the upcoming store-wide sale.
Step 3: Reassessing Product Lines
The monthly sales data reveals only 20 units of smartwatches are sold compared to 200 units of fitness trackers. ElectroFusion opts to reduce smartwatch orders for the next quarter.
Step 4: Hosting Clearance Events
To clear out an old line of tablets with 300 units still in stock, ElectroFusion organizes a weekend clearance event, marking them down by 40%.
Step 5: Engaging in Collaborative Promotions and Partnerships
ElectroFusion collaborates with "Sound Vibes," a music streaming service, offering a three-month free subscription for every purchase of their overstocked 400 high-end earbuds.
We hope this article has given you a better understanding of what slow moving inventory means and how to manage it.