An inventory write-off is a formal recognition that a portion of a company’s inventory no longer has value. Sometimes inventory write-offs are necessary. However, if the inventory write-offs are large and frequent, it may indicate that a company has poor inventory management. So, how do you reduce inventory write-offs? Let’s look at some important tips on how to prevent and reduce inventory write-offs with a proper inventory management system in place.
Avoid Excess Purchasing
It’s easy to get excited and manufacture a large number 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.
Create an Inventory Reserve
A helpful way for you to avoid inventory losses is to create an inventory reserve. It may not prevent your inventory items from losing their value but understanding historical selling data and current market conditions can help you make predictions about your inventory. This reserve will be accounted for as an expense on your income statement.
Utilize Write-Downs as Needed
The reason why companies in your industry are successful is that 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 mean 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:
- Reducing setup time and costs
- Re-evaluating cost of holding inventory
- Understanding warehouse storage procedures
- Understanding cost trade-offs of labor, transportation, and inventory
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 the 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.
Choose Tenax for Inventory Management
Getting a better understanding of your products and how they move throughout the supply chain is vital to effectively running a retail 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.
Real-time inventory management can help you keep better track of your orders, sales, and locations of your products at each of your warehouses. If you want to implement robust inventory management software, our 3PL company can help you. Tenaxx Logistics offers services such as real-time inventory management, e-commerce fulfillment, fulfillment solutions, and fulfillment markets. You can contact us by e-mail at info@tenaxtransport.com or by phone at 519-260-2738.