Excess Inventory Creating Financial Headaches? Here's What to Do

7/13/2015
It has been months since the West Coast port disputes were resolved and news headlines have disappeared, yet retailers are still dealing with the supply chain and inventory disruptions they created over the winter. In fact, when questioned about the impacts of the turmoil, Trevor Edwards, president of Nike Brand said, "We do expect it will take a few quarters to return to fully normalized product flow."

The lingering effects of the West Coast port strikes were compounded for retailers by the long, harsh winter. Record-breaking snowfalls and prolonged sub-freezing temperatures not only hurt in-store traffic levels but also delayed the promotion and sale of many retailers' spring inventories. 

Lower consumer spending through winter and a shortened spring season plagued with supply chain disruptions have left retailers scrambling to return inventory levels back to normal levels while minimizing financial losses. While many are choosing to mark down their inventory in-store to eliminate excess, sometimes multiple times, this strategy can come at a significant cost. Despite being able to use their same distribution channels and move product, albeit at reduced pricing, retailers can also lower future revenue by reducing the available shelf space and time to sell the next season's merchandise. This is a fairly slow way for retailers to get back on track, especially after such a significant disruption.

For retailers interested in getting back to "normal" a little more quickly, there are a couple of other options, like liquidation and corporate trade, which could be more appealing. These two alternatives each provide their own unique benefits. Choosing the one that is right for your company will depend on your current situation and longer-term priorities. Is there a short-term cash need? Are you interested in expanding distribution channels? Is reducing costs the primary objective? By answering these questions, retailers can effectively compare liquidation and corporate trade and determine which solution is right for them.

Liquidation
Liquidation of excess inventory involves selling off assets quickly, often for a lower price than what was paid for them. Companies can either dispose of inventory through their established distribution channels at dramatically reduced prices or sell entire inventories to a liquidator, also known as an off-price buyer, who pays a lower price for the products and immediately takes possession of them.

Retailers frequently turn to liquidation because it can help them to quickly generate cash – something that companies with excess inventory often seek. Additionally, it is currently the most accepted method of handling excess inventory – so much so that it has been incorporated into most companies' supply chain strategies. For many retailers, liquidation is the automatic solution when facing excess inventory.

While liquidation has its benefits, it does pose some significant drawbacks. Because inventory is typically sold for a lesser value than what the company originally paid, retailers must take a significant financial loss on their books. When reported, this may negatively impact investors' perception of the company. Furthermore, until the excess inventory is either sold or the liquidator takes possession, storing the assets means the company is paying for warehouse space that cannot be used to stock upcoming seasonal merchandise.

Corporate trade
With corporate trade, a retailer's excess inventory is purchased with trade credits, cash or a combination of the two. Payment is typically equal to the wholesale or acquisition cost of the assets. In return, the retailer agrees to make certain business expenditures through the corporate trade company, using the trade credit as partial payment. Expenditures often purchased through a corporate trade company include media, retail marketing, travel & events, freight & logistics, and lighting.

Corporate trade allows retailers to receive more value for their excess inventory than what they would receive as a result of in-store discounts and liquidation because the value received in trade credits or cash is typically higher than the discounted or liquidated value of the assets. From a brand protection perspective, in many cases, corporate trade companies sell the inventory to the same distribution channels that the retailer has in place, which minimizes supply chain disruptions. Additionally, because corporate trade companies typically work with companies across multiple categories, they can provide access to additional, alternative distribution channels – ones that may otherwise be inaccessible to retailers – including trading partners or private networks (i.e. employee, friend and family sales).

However, retailers should know that while corporate trade provides a way to realize the full value of excess inventory, retailers must commit to make future, mutually agreed upon, business expenditures through the corporate trade company. Thus, retailers should understand the caliber of trading inventory of the corporate trade company and have the ability to involve other parts of the retail organization that can leverage those services. These elements are key to achieving the full potential of corporate trade.

This is the point – when trade credits are used – that corporate trade's added value is recognized. As long as retailers are comfortable with purchasing certain business services through the corporate trade company, the model provides flexible solutions to meet the needs of most retailers. 

Choosing between liquidation and corporate trade
Both of these options offer measurable benefits to retailers. Liquidation is straightforward and already widely accepted and used by many companies. The financial benefit it offers, while immediate, is limited. Retailers are increasingly looking to corporate trade as an alternative to liquidation because it can provide improved financial benefits and added value for inventory. Retailers interested in corporate trade should look to ensure that the caliber and breadth of the corporate trade company's services aligns with their own purchasing needs. They should also work to involve multiple divisions within the business - marketing, finance, procurement - which can increase the value a corporate trade partner is able to provide. Furthermore, depending on the payment structure, companies using corporate trade may not achieve the financial benefit right away.

While large-scale supply chain disruptions such as the West Coast port disputes and the long winter will never go away, the good news is that there are options for managing the revenue and inventory impact those events may have on your business. Ultimately, companies will need to be strategic and proactive in identifying the best opportunity to recapture as much value as they possibly can from the excess inventory they now have.


Kevin Farkas is executive vice president of Active International, a corporate trade services company.
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