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The Gift That Keeps On Taking: How Dead Inventory Can Strangle Your Sound Business

"This stuff is not wine; it won't go up in value with age."

By Michael MacDonald October 20, 2017

Question: What’s the difference between a mature company and a new one?
Answer: Dead inventory.

Of course, there are several other differences, but let’s focus on inventory, which is (or should be) of interest to virtually everyone in our industry. Whether you rent equipment and services or sell them, inventory is critical to the success of your business.

The upside of inventory is pretty easy to understand. Having more inventory allows you to provide customers with products when they want them. Regardless of renting, selling or installing, a universal truth is that customers are generally unwilling to wait for gear to arrive or simply can’t wait because of time-driven issues like concert dates or occupancy permit deadlines.

These factors make your decision easy: stock up! Never turn away a customer because you don’t have what they want when they want it, correct? Maybe yes, but probably no! Having more inventory is not the same as having the right inventory, because inventory that no one wants becomes a huge drag on any business. Let’s explore why.

Consider the establishment of your business, a point in time when you likely calculated the minimum inventory you’d need to be successful. At the outset of any business venture, the single biggest concern is “start up” capital. Whether an owner contributes his/her own capital or borrows it from a lender, the goal is minimum investment.

This is important for several reasons. Obviously, the less it costs to start a business, the better. Smaller loans mean smaller loan payments, and this translates to more profit.

Further, the cost of space continues to rise. As a businessperson, you understand overhead cost and want to minimize it. More inventory carries an overhead space penalty that can drain a business.

Also, the labor required to manage inventory is both expensive and limited. Having excess product means unnecessary and tedious inventory counts and excessive movement of products around the warehouse in order to get at the fast-moving items.

Finally, overstocked inventory invites theft (or “shrinkage” as it’s also called). We like to think that the people in our employ are honest and upstanding, and, indeed, most are. However, the smart manager works to minimize temptation. Overstocking challenges the integrity of workers, and some will cave in to temptation, creating an assortment of new problems to manage.

Getting Control

Certainly none of this is breaking news, and you’ve probably heard it before. But given the dramatic impact inventory can have in “making or breaking it,” certainly spending a bit more time on the subject is warranted.

Over the years, my experience in several businesses has shown that the attention of management is drawn toward revenue and gross margin, and away from inventory control. The real penalty for this approach is lost opportunity when cash is tied up in dead inventory when, instead, it could be invested in products that can turn a profit. Many times I’ve sat with a company principal and listened while he pointed out that he could grow business if he could just get the cash out of dead inventory investments.

Thus, there must be serious focus on managing inventory. But where to start? Let’s first look at the rental company scenario. When the company started out, certain products were purchased due to great terms from certain manufacturers.

Perhaps it wasn’t the best brand or gear in its class, but there was need to expand inventory to meet demand. Now, a few years have passed and management has gotten much better at buying the gear most desired by customers.

This new stuff is out constantly, earning a very nice return, while the old stuff sits in the back of the warehouse collecting dust. It’s kept for busy summer periods like “festival” shows, and no one wants to buy it anyway.

Sound familiar?

This old gear must go! Take what you can get for it, and purchase more of the “good stuff” if there’s a market for renting more. Besides, when summer festival season rolls around, you can always rent someone else’s “dog” inventory if needed!

Granted, selling old PA equipment can be difficult. But it won’t get any easier tomorrow as opposed to today, so get to work. Run ads, list the parts on eBay, employ the services of any one of a number of sound equipment brokers – do what you must to lose it.

One word of advice: sell outside of your “territory.” Otherwise, you may find yourself competing against some guy with your old PA. He likely won’t be around long but could do real damage to rental rates that could have impact long after he’s gone.

Break The Cycle

Now let’s look at the sales side, where problems can be just as hard to solve. The conversation always begins with the same comment: “I bought this because it seemed like a really good deal at the time,” and ends with, “I had no idea that vendor ‘X’ would come out with a new 60-bit processor so quickly and now I’m stuck with all of this old stuff. Arrgh!”

Regardless, the result is the same. Business cash or “working capital” is tied up in dead inventory rather than being invested in fast-moving inventory. It’s a situation, again, boiling down to the all-too-often painful realization that dead inventory may have to be sold at a loss.

Remember the old adage, “This stuff is not wine; it won’t go up in value with age.” Bad inventory translates to a money-losing proposition that requires discipline and determination to turn in the right direction.

One approach to lessen the impact is selling relatively small amounts of bad inventory on a constant basis. This is a far better way to go than letting it stack up to the point where drastic action is required. Another prudent move is accruing a reserve on your balance sheet. This accounting tactic allows budgeting for obsolete inventory costs. It doesn’t change the cost of getting rid of inventory, but does facilitate better management of it.

And if you’re an employee reading this and thinking it’s not your problem – think again.  Any employee who can actively help manage and get rid of dead inventory will be first in line when bonus and raise time comes around, and in uncertain economic times, every member of an organization must do everything possible to pitch in to keep the business afloat and hopefully growing.

The most important thing to remember is that almost every company has cash tied up in dead inventory that, if liquidated, falls straight to the bottom line. Now and later, that’s good business and benefits everyone in the organization.


About Michael

Michael MacDonald
Michael MacDonald

President. ATK Audiotek
Michael is the president of leading production company ATK Audiotek in Valencia, CA, and has been involved in the professional audio industry for more than 35 years. Beginning as a freelance mixer/engineer in the 1970s, he transitioned to working for manufacturers and has been employed by, developed products for, and consulted with major companies such as Yamaha and JBL Professional.
http://www.atkcorp.com

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