Identifying underperforming suppliers helps to negotiate better with them and look for better alternatives. The following steps and examples will give us an understanding of how this analysis works.
Step 1 Compare supplier-wise old stock and sales proportion to identify suppliers whose contribution to sales is far less than the contribution to the stock.
Step 2 Identify the average deviation between the closing stock proportion and sales proportion (in the example below, it is assumed to be four per cent).
Step 3: Calculate the difference between the closing stock and sales proportion. Suppliers with a difference of more than the average are low-performing
Setup Policies to Return Unsold Inventory to Vendors Wherever Possible
If an inventory is not sold for certain days, it is highly probable that it would not be sold forever. Set an average holding period for each item in the inventory and if there is any unsold inventory beyond this set period, get them returned to vendors. Steps to do this:
Step 1 Identify the Average Aging of the Item and set the desired number of days the company wants to hold that item as the inventory. To keep it simple, the company can set up one period for all the SKUs (for e.g., I will return every item if it is not sold within 120 days).
Step 2 Negotiate with the vendor and add this term to the POs.
Step 3 Set up a monthly process, where the company’s store manager takes a Returnable Inventory report and initiates the return process.
Step 4 Set up controls in accounting processes to ensure credit notes are issued by vendors for the amount corresponding to returns.
Pro Tip
Due to industry customs, it may not be common practice to return items, especially when bought at good margins. In such cases, incorporate a returns clause only for select high-risk items (new trends, experimental products bought at the store) or with select vendors.
