SMI (Slow Moving Inventory) is, of course, a relative term, and one
business’ SMI can move a lot faster than another’s A list. Building a
definition specific to your operation is the key to dealing with SMI
This is a particular concern for ecommerce retailers, as many of them use e-fulfilment services and may not be aware of the speed some of their SKUs move.
Three factors are generally the most relevant in e-fulfilment, and we will explore them
OverstockThis is an important concept, but overstocked inventory is not necessarily SMI, nor is SMI by definition overstocked. Overstock is any inventory that you have had six months’ worth of stock built up for more than twelve months (to differentiate from building up for seasonal demand). If you use this definition of SMI, as some do, you ignore the shipment frequency factor, and get false numbers.
Inventory Turnover RateMany retailers define SMI by stock turns. This is a more useful method, as low turnover items share a lot of the same drawbacks as real SMI, but this definition ignores order size.
Larger orders are generally less expensive per unit, but taking advantage of that means slower stock turnover. If it works out cheaper to buy a year’s supply of widgets, even after accounting for storage costs, it would be wrong to define it as SMI, because it isn’t problematic inventory at all. E-commerce retailers need to be conscious of the dangers of storing too much of anything, though.
Shipment FrequencyPossibly the most useful definition of slow moving inventory is tied to the frequency of outbound shipment. Look at it in terms of SKUs. If you have shipped zero of a particular SKU over the last 3 or 4 months, then it is probably slow moving.
Again, the ratio of days to units varies greatly, depending on your business. I know a few people who would be thrilled to move 4 units a year, but they are very expensive units. Each seller must define their own threshold, but it should always be defined by the unit/day ratio for the best and most useful numbers. Your e-fulfillment partner can supply you with these numbers, if you do not already have them.
Now that you can determine which of your SKUs are slow, you can decide what to do about it. That is the subject of part 2, coming soon.