Slow-Moving Inventory

What Is Slow-Moving Inventory?

Slow-moving Inventory refers to goods that remain stocked up in the warehouse for a long time. Depending on whether they are finished products or raw materials, they either remain unsold or unused for production. When goods do not have high customer demand, they do not move easily from one stage to the next.

Such inventory takes a long time to sell or leave the store or factory. It is due to low or negligible demand, which itself has many causes. Every business has some slow-moving inventory, which it must account for to ensure accurate financial reporting. Firms strive to reduce slow-moving inventory since capital gets locked up in such items. Also, they eat up storage space.

• Slow-moving inventory refers to products that experience low demand and consequently take a long time to sell and leave the storage facility or retail space. It includes both raw materials and finished goods, which take six months or more to sell.
• The reduced demand may be due to various reasons, including changing market demand, technological advancements, or seasonal fluctuations.
• Such inventory is calculated and identified based on its turnover ratio, which is obtained by dividing the Cost of Goods Sold (COGS) by the average inventory value for the given period.
• It is challenging for small businesses to store and move such inventory. Also, inventory valuation is difficult. Hence, an independent process is followed to account for and record such items in a company’s books of accounts.

Slow-Moving Inventory Explained

Slow-moving inventory comprises items stored in a facility or store due to minimal, low, or reduced demand. It occupies storage space, and factory owners, vendors, or sellers are forced to invest resources to maintain them. Since these goods take a long time to sell or move to the next stage in production, they are considered a financial burden on the holder.

Slow-moving inventory includes both raw materials and finished goods. Hence, it can refer to a stock of raw materials sitting in a factory or manufacturing unit or finished goods in a retail store or warehouse. The cost of holding such goods is high, with costs like inventory carrying charges, debt, labor, and freight expenses being included in these calculations.

The slow-moving inventory definition states that such items typically take six months or more to sell. During this time, inventory holders can choose to keep this stock. However, they usually attempt to sell it by employing various ways that can help such stock move. This type of inventory affects small business owners with low storage facilities and limited resources adversely.

It is sometimes confused with obsolete inventory, which is also called dead stock because the items are never sold. However, it is not the same as dead stock. While the risk of obsolescence is true, slow-moving inventory becomes slow-moving for various reasons. For instance, it could be because of low demand for such products in the market. Hence, if a seller stores and manages such goods properly, they can sell the stock later when the goods are back in demand.

It is important to note that slow-moving inventory may become obsolete if it is not sold within a given timeframe. This usually happens due to changes in consumer preferences, technological advancements, or economic downturns.

The slow-moving inventory accounting is different, given the fact that the inactivity of such items contributes to wasted capital, carrying costs, and debts taken against such inventory. Costs also include freight and other charges. Opportunity costs are another major disadvantage of such inventory that leads to missed opportunities for profit-making or value creation. In the context of bookkeeping and accounting, inventory valuation poses considerable challenges when dealing with slow-moving goods.

Smart planning and better demand forecasting are crucial to avoid accumulating such inventory. Additionally, effective market studies, product positioning, sales strategies, supplier collaboration, flexible inventory management, and omnichannel marketing strategies can save sellers from slow-moving inventory.

How To Calculate?

By calculating the inventory turnover rate/ratio, such inventory can be identified.

Inventory Turnover Ratio = Cost of Goods Sold (COGS)/Average Inventory Value

Average Inventory Value = (Opening Inventory + Closing Inventory)/2

Inventory turnover is the rate at which inventory stock is sold, used, and replaced. It is calculated by dividing the cost of goods by the average inventory for a given period. A higher ratio tends to point to strong sales and a lower one to weak sales. It means a high turnover ratio suggests that a business does not have excess stock. Conversely, a low inventory turnover ratio usually indicates that the business is overstocked or has slow-moving inventory that is not selling well within the required timeframe.

How To Identify?

There are three important slow-moving inventory analysis techniques that helps identify and manage inventories:

1. ABC Analysis

It divides goods into three types:

• A - denotes the most valuable items that account for 70% of the total annual usage value but make up for approximately 10-15% of the total inventory. Hence, it can be called fast-moving inventory.
• B - signifies moderately valued goods. These items account for around 20% of the total annual usage value but comprise 20 to 30% of the total inventory.
• C - comprises the least valued items, which account for only 10% of the total annual usage but make up for around 60% of the total inventory value. These are slow-moving items.

2. FSN Analysis

In this technique, the goods are categorized based on their consumption rate.

• F means fast-moving,
• S refers to slow-moving, and
• N defines non-moving goods.

3. SDE Analysis

It divides items based on their procurement; in this analysis,

• S - means scarce, indicating they are difficult to acquire due to limited availability, use of specialized production techniques, or long lead times.
• D - means difficult. These are difficult to procure but are not scarce.
• E - represents easy. Multiple sources are available to procure such goods.

By applying these systems, businesses can identify, analyze, and manage inventory well. These inventory management techniques can help companies reduce carrying costs, improve cash flows, and increase profitability.

Examples

Below are two examples of slow-moving inventory.

Example #1

Suppose Stefi manufactures umbrellas. The rainy season is just around the corner, and Stefi expects that the sales will increase exponentially because weather reports say the season will last for around three months. She produces 900 umbrellas. As it starts to rain, people buy them. She managed to sell around 540 umbrellas in three months. The rest were held in stock.

Suppose the value of the inventory in hand in the beginning was $9000, and at the end of the period, the closing inventory value was $3600

Average inventory value = (9000 + 3600)/2 = 12600/2 = $6300

Assuming the COGS is $13500,

The turnover ratio = 13500/6300 = 2.14

The low ratio shows that the sales were weak. Stefi knows that the 360 unsold umbrellas will require storage space. As the season ends, this becomes a slow-moving inventory for her.

According to the slow-moving inventory analysis, Stefi failed to estimate the demand accurately. She overestimated the sales numbers due to inadequate market study and did not factor in the strength of competitors, leading to the excess production of umbrellas. Stefi can now keep this stock, or she may choose to sell it at a discounted price.

Example #2

An August 2022 Digital Commerce 360 report states that US retailers, in the second quarter of 2022, rid themselves of slow-moving items by offering discounts on many not-in-demand items. Retailers said they had considerable inventory, but the demand for these goods was negligible. Per the second-quarter earnings reports, many large US retailers offered discounts to sell off their slow-moving stock. However, this affected their sales and distorted sales projections for the rest of 2022.

The main reason for these slow-moving goods was the changes seen in consumer purchasing behavior due to inflation. Experts believe that people prefer to postpone certain purchases to meet the costs of essentials like food and fuel. Hence, items like apparel, accessories, and household goods take a backseat. They believe the pandemic affected demand projections for certain goods like athleisure apparel.

How To Reduce?

Here are some ways to reduce slow-moving inventory.

• Returning slow-moving stocks to suppliers or manufacturers is the most effective way to reduce it quickly and efficiently. This process is called reverse logistics, which refers to managing the flow of goods in reverse, i.e., from the point of consumption to the point of origin.
• If such inventory cannot be returned to its original suppliers or manufacturers, selling such stock at discounted prices is a reasonable option to reduce losses and generate some revenue. It can be particularly effective for non-perishable goods.
• End-of-Season Sale (EOSS), also called a clearance sale, is a common method used by businesses to sell slow-moving stocks.
• If multiple items are stored as slow-moving goods, the seller can try to bundle them and sell them as a package to reduce their number.
• A seller can reduce the number of slow-moving items by making them more appealing to the target market. This is possible via marketing, market repositioning, running offers & discounts, social media marketing, influencer marketing, etc.
• If the inventoried items are raw materials, producers can continue manufacturing the finished products. Even if the demand for the finished products is not high, continuing to manufacture ensures that such stock becomes finished goods, which can be sold faster than raw materials.
• Bartering or trading slow-moving goods with suppliers to obtain other products is an effective strategy for certain retailers looking to reduce excess inventory. However, establishing relationships with suppliers is crucial for such transactions. Hence, this may not be a feasible option for every retailer.

Difference Between Slow-Moving And Fast-Moving Inventory

The key differences between a slow-moving inventory and a fast-moving inventory are listed below.

• Slow-moving inventory refers to goods that take a long time to sell or leave the warehouse or factory while fast-moving inventory refers to products that move quickly.
• It has low demand for various reasons like changes in consumer choices, technological obsolescence, ineffective marketing, etc., but fast-moving inventory has a high market demand.
• For slow-moving goods, the business or seller has to be patient and accept the risk of potential loss. On the flip side, fast-moving inventory makes sellers constantly worry about supply and replenishment.
• Slow-moving inventory has a turnover ratio range between 1 and 3. In contrast, fast-moving inventory has a turnover ratio of more than 3.
• Slow-moving inventory constitutes 30% to 35% of the total inventory, which, in the case of fast-moving inventory, varies between 10% to 15%.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to what is Slow-Moving Inventory. We explain its examples, how to calculate and reduce it, and comparison with fast moving inventory. You may also find some useful articles here -

• Vendor Managed Inventory
• Inventory Audit
• Inventory Turnover Ratio