Accounting Best Practices, Fifth Edition

16–32. Reduce the Number of Products

The sales department loves to shower customers with a broad range of products to fit every possible need. A company can certainly maximize its sales by doing so. The problem is that it is not maximizing its profits. With an enormous range of product offerings comes a massive investment in finished goods inventory, since many of the products will sell only occasionally but must still be stocked against the possibility of an order. Further, raw materials and subassemblies must be stocked in case more products are needed. In addition, the rates of obsolescence will be higher with more products, since some products will almost certainly be overproduced and will languish in the warehouse for years.

The solution is a periodic planned review of the entire range of product offerings, with the intent of eliminating the slow-moving items. The accounting staff must be heavily involved in this effort, reporting on sales trends, inventory investment, and direct profits by product. The sales department will resist the reduction on the grounds that sales will be lost, so the company should involve senior management in the process in order to enforce the decision to eliminate products.

The primary downside to this best practice is the initial reduction in earnings caused by inventory write-offs when it is first implemented, since a number of products may require pruning.

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