Stock balancing, simply, is the dealer returning unsold inventory to their supplier. The underlying motivation in stock balancing is to free up dollars that are tied up in slow moving inventory in order to purchase new stock that the dealer plans to turn over quicker than the slow moving stock. It’s typical for dealers to arrange a stock balancing arrangement with their supplier in advance of the launch of a new model, or the beginning of their next fiscal period, either quarterly or annually.
And it’s not uncommon for a dealer to find that they have inventory that’s simply not moving, for whatever reason. Slow or motionless inventory is a problem for any business anywhere in the supply chain, whether retailer, installer, distributor or manufacturer.
A product just sitting there doesn’t just cost what it originally cost — there’s also the ongoing cost of keeping it on the shelf, and intangibles, like the lost opportunity cost of holding onto it, instead of having spent the money on something that turned over faster.
The whole point of buying and holding inventory at all — and this is something that sometimes eludes the understanding of otherwise savvy business people — is to convert the inventory back into cash (by selling it) as soon as possible, using the cash to buy new inventory, and repeating that cycle, over and over.
I’ve been known to remind my dealers when working with them on their assortments and forecasts that they’re in the business of making money, not, as was once related to me, “building and curating a museum of the unsellable.”
True story: One of my long-time dealers retired and sold his business to a competitor (another of my dealers, but that’s neither here nor there). For whatever reason, he was loathe to write down dead stock, and had accumulated a legendary hoard of obsolete product that he kept in an offsite storage location. During negotiations over the sale of his business he tried to unload his dead inventory on the new owners. After reviewing the offsite storage they told him “Are you kidding? If we have to take this stuff we will actually pay you LESS for this deal.”
For retailers, aging inventory is subject to price pressures through advertising by competitors, and the fact that as the product ages, end-user customers will find it less desirable. That’s true of almost everything, from groceries to electronics.
The only good thing that about dead stock is the write-down your accountant can take on it, and the positive impact it can have on your taxes, but that’s not nearly as desirable as selling it and making a profit on it in the first place; it’s a last resort.
This brings us back to stock balancing, and why it’s attractive to the dealer to seek support from their suppliers to take back inventory that’s not doing well for them.
From the perspective of the supplier, supporting your dealer’s stock balancing request can be a positive thing, conditional upon a number of terms. Not the least of which, being amenable to stock balancing with your dealer partners reinforces the strength of the business relationship. Real partnerships are hard to find, and the world is full of suppliers who are super eager to secure a purchase order, but aren’t as quick to jump to the pump when any value-added services are required.
With large national dealers, it’s typical that stock balancing terms will have already been included in the contract between dealer and supplier. Those terms will typically include things like specifically limiting which products are eligible for stock balancing, calendar dates during which stock balancing can be entertained, restocking fees (if any) and logistics.
Dealing as I do with regional independent dealers, most of my stock balancing discussions with dealers are dealt with on a more case by case basis, as need requires. For my part, I’m generally happy to support my dealers, with the condition that the product they wish to swap out is current and resalable.
It’s not unusual for there to be regional variations in selling patterns, and if one dealer in one city is struggling to move a particular SKU, it’s possible that it will sell better in someone else’s stores in a different city. Knowing the lay of the land as it were is part of the job.
And from a relationship perspective, leaving my dealers stuck with dead inventory doesn’t really help their cause or mine. Whenever possible I’d much rather help them out via stock balancing, to free up their cash to allow them to buy even more of my stuff, not just this time, but further down the road.