Inventory losses are big money

Roger OakdenGlobal Logistics

A repeat performance.

When things go wrong with your inventory, there can be some big numbers and, at the very least, it will  be supply chain, logistics and inventory managers who are looking for new jobs!

Six weeks ago I discussed the likely ‘ripple’ effect from a retailer ‘discovering’ about $100m of excess inventory. This week there is another story. The US division of a global wine company has ‘discovered’ it has too much inventory of the wrong wine – the write-down cost is $160m and the immediate financial market response was a 12% slide in the share price!

The outcome will be some very drunk birds at public refuse collection points when $35m of wine is tipped down the drain! There will be happy wholesalers and distributors, given $40m in discounts and rebates to move excess inventory. But there will be very unhappy vineyard owners, as the wine company cancels grape contracts, caused by oversupply (and writes-off $85m of non-cash expenses).

Figures of this magnitude mean that sales objectives and inventory did not just ‘go wrong’. This is a problem that has been festering for some years (and covered up?). Aged inventory reports are not rocket science, so it would appear there has been a lack of transparency in the distribution channels.

Channel stuffing and its consequences

When selling consumer products, it is not unknown that to attain sales quota (and so get bonuses and island holidays), sales staff will offer extended payment terms and discounts for wholesalers and distributors to buy stock in advance of actual sales requirements. This is called channel stuffing. It works so long as the supply chain through the retailers and out to consumers is flowing, even with seasonality. However, if retailers or consumers do not want the product; it sits at the intermediaries warehouses and nobody wants to talk about it.

But the brand company sales department see channel stuffing as ‘real’ sales, so the system orders replacement stock and that is why the vineyard owners are unhappy – they were growing grapes to satisfy a ghost market.

This case illustrates that sales staff need to understand how their sales efforts can affect the business, sales managers the consequences of discounts and extended payment terms on the flow of product and inventory professionals need to do their job and manage inventory.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...