Slow-moving inventory presents a significant challenge for eCommerce businesses like yours. How do you understand and balance potential revenue from these products against their increased costs for warehouse space, storage, and more? When is it worth holding on to products for months?
They’re difficult decisions and need to take your entire operations into account. In this post, we’ll:
- Define slow-moving inventory
- Compare it to obsolete inventory
- Help you identify if you have slow-moving inventory
- Learn how to understand if low inventory turnover is harming you
- Explore three sales and inventory management options to keep your business strong
So, let’s look at this type of inventory and start determining when it presents a substantial opportunity for you.
What is slow-moving inventory?
Slow-moving inventory covers any products you have that have a long sales cycle. Generally, this would include SKUs that only sell a few units every three to six months. However, in the eCommerce space, some companies look at a shorter window of time. Your slow-moving inventory may sit on shelves for just one to two months while other goods stay for only days or a few weeks at a time.
Slow-moving items tend to be more expensive or have a more significant investment from the consumer. Appliances like refrigerators or washing machines, for example, are a bigger purchase and tend to not sell at high volumes. Slow-moving items also might be seasonal items that perform well during certain parts of the year but average few sales during off-season months.
The timeframe you use for identifying slow-moving inventory and if these products are smart business all depends on your eCommerce operations and current growth strategy.
Slow-moving vs obsolete inventory
Like milk left in the fridge too long, obsolete inventory is slow-moving inventory gone bad. For eCommerce businesses, this means you’ve got products sitting on shelves that are at the end of their life cycle, either not selling for an extended period or newer versions have replaced them.
Obsolete inventory isn’t expected to sell in the future, which can be a significant problem in large quantities because of how much capital it ties up for your business. If you still think products will sell, especially if you put more marketing behind them, then they’re still slow-moving. Identifying obsolete inventory is helpful because it gives you a clear picture and next steps.
Obsolete inventory can cause significant losses for a company, but you do have the chance to write off part of it as an expense. To get this important tax deduction, you’ll need to do one of three things:
- Sell it below regular or sales pricing to a firm such as a liquidator.
- Donating it at no cost to a charity
- Destroy it and documenting the inventory before and after destruction.
Regularly review your inventory. Many regulations require you to write off obsolete inventory as soon as it is determined to be obsolete. Waiting too long could mean you lose the ability to write it off and then take a more significant loss.
How do you identify slow-moving inventory?
Slow-moving inventory isn’t necessarily a bad thing for your eCommerce business. What’s important to determine is if these goods generate enough revenue to pay for their storage and give you a healthy margin. Inventory management tools can help you create this understanding. One of the best ways to identify slow-moving inventory is to start with the inventory turnover ratio.
The inventory turnover ratio calculates how long it takes your goods to sell once placed in stock. “In stock” means you have it in your warehouse or have delivered it to a 3PL partner like Red Stag Fulfillment, and the goods are processed and ready to be used to fill an order as soon as you get one. If you’re turning over your entire stock 12 times a year, then the ratio says you’re turning over the inventory monthly, on average. Or, if your turnover count is twice per year, then your ratio says it takes six months for you to sell these goods.
You can identify slow-moving inventory by looking at what doesn’t sell often and has been sitting on your shelves more than other products. Comparing SKUs in your inventory management system can identify low turnover or what products potentially have limited appeal to customers.
Is it okay for my business?
Slow-moving inventory is a heavy capital investment for many eCommerce companies. If they don’t sell well, these units can eat into gross profit significantly. However, if they have windows of quick sales or each order generates significant revenue for your business, they can be a strong performer and a valuable part of your business.
After identifying slow-moving inventory, it’s time to determine the cost of goods across these items. Use the turnover ratio previously mentioned and look across your inventory management tools. Start calculating how much the slow-moving inventory is costing you across the entire timeframe you select.
Key cost categories to help you determine if they’re smart or if you have excess inventory include:
- Inbound freight to ship it to your fulfillment center
- Warehouse space
- Labor and equipment-related holding costs
- Insurance costs
- Any loans or credit lines taken out to finance the purchase of the inventory (and interest accrued on these)
You may also want to consider calculating an “opportunity cost.” This is an estimate of what you might’ve sold if you had this space available to sell faster-moving inventory.
In some cases, you’ll find that what you’ve considered slow-moving inventory still plays a significant role in your gross profit for the year. If that’s the case, the trick is to work with a 3PL like Red Stag Fulfillment to determine if you’ve got excess inventory. Eliminating that can trim down your costs while still maintaining enough stock to meet orders as they arrive.
How should eCommerce handle slow-moving items?
Remember that eCommerce is all about building demand and moving products to generate income for today’s and tomorrow’s bills. Every unit of inventory should play a role in maintaining the cash you need. If your company has slow-moving inventory that plays a vital role in your profitability, you’ll need the warehouse space to store it. You can also work with a fulfillment service provider specializing in slow-moving items and has prices designed to keep your costs low.
Introduce fast-moving inventory
If you identify slow-moving inventory in your mix, consider ways to supplement these sales with fast-moving items. Look for an item or product line that directly supports your long-term sale efforts. This can be furniture polish and cleaners to go with tables, batteries, backup parts, or other items needed to keep your money-makers working.
Companies that focus on big-ticket items can also start selling more entry-level products in the same category. Think about the types of goods you can sell with marketing around Mother’s Day or Father’s Day, for example. That’ll help you reach a wider audience and potentially move more of your capital-heavy items down the road.
Shift away from what’s not working
It’s likely time to start thinking about dropping a product when demand forecasting shows that there’s little product interest or you realize that sales aren’t recouping your costs per unit. Sometimes, you’ll slim down slow-moving stock quantities to minimize holding costs. If your inventory management costs and product data show that even a few units will eat into your profitability, it might be time to change your strategy and SKUs.
Streamline how you’re moving products
Goods that take up a lot of capital but generate substantial revenue need to be optimized for storage and order fulfillment. Getting this right depends on their value, your customer data, and how you manage sales and marketing.
Red Stag Fulfillment and other 3PLs work with companies like yours to prevent damage during longer storage while also offering a storage rate that doesn’t break the bank. Find someone who knows your products and needs and can help you streamline fulfillment. Ask about how they’ll reduce your costs, help you with demand forecasting, trim down labor requirements, and get you the best rates with carriers.