Why liquidation of excess inventory is worth worrying about
I gave a talk in February at the Reverse Logistics Conference in Las Vegas about liquidation and why, for most companies, it is still being managed the same way it was decades ago. The main point I made was that companies don’t understand why they should allocate resources to improving this process. There are a couple reasons for this:
- Liquidation is viewed as a money-losing initiative. Most companies don’t even want to admit they have a need for liquidation, let alone invest money in improving it.
- If a company’s liquidation revenue represents 3% of sales, which is generally in the ballpark for large enterprises, a 20% to 40% increase in recovery rate only impacts revenue by a fraction of a percent. Not nearly enough to get management’s attention.
However, there is another way to look at this. Increasing recovery rate on liquidation is like raising price on a product. If you are selling an item this week for $100 and next week you find you can sell it for $120, that incremental $20 drops straight to your bottom line. There is no additional cost of goods, marketing expense or other overhead to accomplish this. This is exactly what is happening when you increase recovery rate on liquidation product.
Let’s run through some math. Let’s say you are a retailer with $100 million in revenue and $3 million of that comes from liquidation sales. Let’s also assume you are a relatively well run retailer and you have an operating earnings margin of 6%. If you were able to improve pricing on your inventory liquidation with excess inventory sales by 20% (which is not an uncommon outcome for our clients), you would have made a 0.6% impact on the top line. Pretty insignificant. However, this $600k of price improvement is much more meaningful when compared to the company’s $6 million of operating profit. Now, all of a sudden, you have increased operating profit by 10%. Not bad.
The kicker here is when you consider what the company would have to do in terms of increasing sales of everyday ‘A’ stock product to have the same impact on operating profit. Ignoring that some overhead is fixed for simplicity, you can quickly calculate that the company would have to generate an incremental $10 million in top line sales to generate the same $600k in incremental operating profit. Furthermore, if I was generous in my assumption of a 6% operating margin and you have only a 5% margin, the sales required jumps to $12 million (or a 12% increase in overall sales)!
Think about the lengths your company goes to to achieve 12% revenue growth in a year!
Even if it took lots of money and hard work to achieve this 20% increase in recovery rates, I would argue it is just as worthwhile as a 12% increase in overall sales (maybe even more so because it improves your company’s margins, making your business stronger overall). The fact is, it does not take lots of money or effort to accomplish this. You can achieve this increase in recovery rates with almost no work at all! B-Stock Solutions provides all of the technology and services to manage this for our customers on a hosted SaaS basis. Call us and let us tell you how it works.