The problem of liquidating the dead inventories

I have written a while ago about the problems that hard goods retailers faces when they try to buy in bulk and push it to the market. Yes , you guessed it right , they end up with a lot of inventories that they classify as " slow moving " or "non moving" inventories. I have explained the reasons and also how to make it better. if you have missed it, here is the link to it.

https://www.dhirubhai.net/pulse/small-retail-stock-liquidation-problem-how-avoid-munavver-fairooze

Today , l thought I will dive a little more deeper in to the subject and see if it is really possible for these organisations to sell this goods at a profit after holding it for too long time. This is because I think that the real problem is not about knowing how they end up with dead stocks, it is about how they assume that the cost of holding these inventories somehow justifies with the profits that they will make while buying with a cheaper price. Let me throw some light on this matter.

The Assumption of Liquidating the inventories :

One of the major assumptions that people make is that if they can't sell it for the desired price , they can liquidate it with a lesser price. In fact , people only buy what they want and what is useful to them. Of course , you can nudge people to buy an older stock of the products with cheaper price , but you cannot guarantee the demand of these products will increase as much to liquidate it with in a desired time frame ! This is why you need to understand if it is really profitable when you completes the sales cycle of that particular product.

Let me explain this with this graph above , the blue line denotes the normal life cycle of a newly introduced product in the market. You can see how its demand rises and falls over time. A common assumption is to liquidate the product when the demand starts to fall dramatically at the decline stage of the life cycle. This is usually done by reducing the prices. The problem here is that the product is already replaced with better products in the market at this point of time and thus the demand recovery will be too difficult and thus liquidating such items will take way too longer time than expected. This can result in a huge carrying cost ( cost of holding it and maintaining it in the warehouses / showrooms ) of this item. A much better liquidating point would be at the peak of maturity phase of the product life cycle , because the demand of the product is still intact !

You can only liquidate or push products to the customers when it is still in demand !

Impacts on the profits :

The real problem with these practices are its hidden affects on profits thats often overlooked as it happens over a brief period of time. it is like a snail that carves the profit margins out of the products when it stops selling by itself. This is the moment when this product becomes a total "liability" from a very good "asset" to the organisation. Here is an illustration

As said earlier , liquidating at a later stage after the peak demand can make the process too long. There are two critical problems that arises with this, the prices of the products needs to be kept down continuously ( to push it ) and the cost of holding the products keeps on increasing ! Now if you see the picture above , you can see the loss making bracket of something as a period where the organisation will suffer a loss due to this scenario.

Now let us take the other scenario of liquidating at the optimal point , which is at the peak demand of the product just before it starts to decline . Here is the graph.

You can see that the time taken to liquidate is less than two months than the previous one ( look the timeline ) . This happens because the demand of the product has not yet completely dried up and the prices have come down too. Although , the organisation still makes a loss due to rising costs, it is still much lesser compared to the previous scenario.

Other Impacts

Although , the most direct affects are on profits , holding the inventories more than a certain time can have many other indirect impacts in the business.

1. These items consume more space in the warehouses and showrooms making it difficult to accommodate the other products which can be sold easily
2. The working capital thats invested in these products will be locked for a long period of time. This can increase the over all cost of running the business
3. These higher costs can make an organisation vulnerable to its supplier as it will struggle to meet their payment deadlines. This can further deteriorate the business relationships and also can lead to missing of many benefits that the suppler offered on an advance payment or timely payment.
4. This can also lead the retailers in delaying the purchase of latest / trending products in the market at the right time, missing out sure shot sales of these items and making a huge opportunity loss.

In conclusion , holding inventories by making a bulk purchases are not at all advisable . However , if you are a small retailer who have no choice to buy in small lots due to your location restrictions or supplier restrictions, you should be very careful in analysing the movement of the products and should be vigilant to understand the demand fall of the product . Only this can lead you to take the right decision on "when" you should start liquidating these items.

That's it for today , Hope you have enjoyed it . Also, please feel free to comment or suggest anything that could be worth discussing or writing in the future, Thank You !