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Don't Kick an Unprofitable Inventory Can Down the Road

During a turnaround, the most immediate concern is generating cash.  An effective strategy that involves slashing expenses, selling off surplus assets and raising capital can quickly prevent a business from shuttering.  However, additional steps must be taken to ensure ongoing profitability and prevent the risk of falling back into distress.  In designing an optimal product mix it is imperative that management thoroughly analyze individual inventory line items through a combination of 5 key performance measures: 

  • Profit margin

  • Break even

  • Optimal turn rate

  • Optimal inventory level

  • Inventory period to obsolescence

When equipped with these tools, individual products that have a negative effect on profitability and cash flow can be identified and eliminated, pricing strategies and overall inventory levels can be designed to meet the demands of the marketplace, and marketing, product placement and sales strategies can be designed around an effective mix of lower margin, higher-priced items and higher priced, lower-margin items. Management often defaults to old habits.  When product lines are realigned and profitable, old habits do not have to be detrimental to the business. 

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