Dead Stock Costs HVACR Wholesalers Between .44-.79% of Margin — Every Year

The accumulation of dead stock may be costing you significantly more than you ever imagined. Thrive recently analyzed a collection of multi-location hardlines wholesalers and found:

• 12-30% of hardline wholesalers’ total inventory hasn’t sold in over 12 months, aka Dead Stock.

• The annualized increase in dead stock on a year over year basis is the equivalent to .44-.79% of total revenue or, to put it in another way,

• Between .55 - 1% of all purchases sit on the shelf, never sell and eventually turn into dead stock.

To put this in perspective, based on the lower end of these estimates, wholesalers are losing over:

• $216,000 a year in bottom line profit for a $50,000,000 wholesaler

• $432,000 a year in bottom line profit for a $100,000,000 wholesaler

• $4,320,000 a year in bottom line profit for a billion-dollar wholesaler

If these numbers seem hard to believe, look at your current inventory that hasn’t sold in over 12 months. Then divide by 10, (which is the number of years after which many distributors write the inventory off their books.) That’s how much you are losing every year.

Why Traditional Approaches Fail

The key to lowering those numbers is to identify and stop buying “dead stock” before it’s ever purchased, which is obviously easier said than done. We’ve found that, on average, 97% of all SKUs sell 10 times or less a year and account for roughly 45% of total inventory for multi-location hardlines wholesalers. It’s these slow-selling SKUs that cause the vast majority of dead stock accumulation and where your focus should be placed.

Let’s first take a look at why dead stock accumulates:

• An inconsistent and over-simplified approach to stock/non-stock decisions. A once-every-six to twelve-month review based on “if it sells more than 3 times to two or more customers stock-it” logic isn’t effective.

• Minimal or no established directives based on corporate objectives. Few companies take the time to develop strategic policies based on corporate objectives to help buyers make stock/non-stock decisions. And, for acquisition-based distributors with multiple buying staffs and/or ERP systems, the application of these policies is rarely followed across the enterprise.

• All SKUs are not created equally. The decision process and business rules for optimizing the management of these low selling-SKUs should include more than just the number of hits and customers, it should take into consideration a wide variety of strategic factors. (A summary of key factors is listed below.)

• ERP and most buying systems inherently overstock low-selling SKUs. HVARC ERP systems were built to be transactional systems to run your business—not advanced inventory management solutions. For low-selling SKUs, they leverage traditional but flawed Order Point/Order-Up-To logic to calculate item level Mins and Maxes, which leads to significant over stock and, eventually, costly dead stock.

• For low-selling SKUs, traditional forecasts and order point calculations aren’t effective. The math doesn’t work. There are not enough “hits” or data inputs at the item level for ERP systems to accurately calculate Min/Maxes. Thus, they over-compensate by adding excess inventory.

• Lack of time and buying based on emotion. When buyers and branch managers manually intervene, it’s typically driven by a specific customer’s needs or emotion based on a recent out-of-stock situation. Then, it’s forgotten to remain overstocked in inventory. They simply don’t have time to deal with these low-selling SKUs.

An Effective Approach to Reducing the Accumulation of Dead Stock

Your primary focus should be on optimizing the Stock/Non-Stock and Min-Max decision process for low-selling SKUS, generally those that sell 10 or less times per year. The real key is to quit buying them before they sell for the last time. Change items to non-stock and adjust Mins/Maxes down to keep buyers from automatically buying excessive quantities. Here are a few suggestions:

1. Business rules should be based on filtered demand at the customer level, not total aggregate sales within a specific time period. Prioritize your inventory investment with a focus on your largest and most profitable customers. Before applying strategic business rules to optimize your inventory:

   1. Remove sales demand for former customers and for localized customer demand that is no longer active, (completed construction projects, one-off customer demand events, etc.) It makes no sense to continue to stock a SKU where the source of the demand is no longer active.

   2. Place emphasis on your key customers. Be more aggressive with your stocking decisions based on sales for those specific customers.

2. Establish a layered series of business rules based on corporate objectives that include a variety of variables, not just “stock it if it has 3 hits and 2 customers.” The decision process should take into consideration a wide variety of factors, (our digital solution includes over 40 different decision criteria), including but not limited to:

   1. The cost and profitability of the SKU. Be more aggressive stocking low cost and high-margin SKUs.

   2. Is it a strategic vendor, product line, DC/branch or sold primarily to key strategic customers?

   3. Is the SKU part of an assembly whereby the cost of lost margin due to a stockout is significantly greater than the SKU’s own margin?

   4. Is the vendor minimum order quantity forcing you to by more than 6-12 months of supply?

   5. When calculating hits during a specific time frame, place a different emphasis on the most recent months. Is it three hits in the past 60 days? Or three hits in the last 12 months?

   6. And many, many others.

3. Be proactive and re-calculate monthly, not once every 6 or 12 months. Too frequently a change in a SKU’s status is only made after it sold for the last time.

4. Make sure buyers and/or branch managers are held accountable for manual overrides of stock/non-stock and min/max changes, including a calendar reminder within 3-6 months. If it’s not selling, move it.

Wholesale distributors should not consider an ever-increasing amount of dead stock as just a cost of doing business—there are proven strategies that can be taken to reduce this persistent drain on profits.

If you have additional questions or would like to learn more about how Thrive has helped distributors reduce the accumulation of dead stock by up to 90%—just call or email. Or even better, we’ll run a proof-of-concept/assessment against your data to show the disparity between your current Min/Maxes and stocking policies against and our optimized recommendations.

Al W. Radford
Senior Supply Chain Advisor
Thrive Technologies
aradford@thrivetech.com
615-337-9405