How to Survive a Recession

LESSON 40: Buy and Sell Excess Inventory or Capacity

When a recession drives financially insecure businesses into closing their doors or going bankrupt, a large amount of excess inventory is left over, sitting in offices, on warehouse floors, and in transit. Transportation, manufacturing, warehousing, and service companies that survive are left with large amounts of excess capacity in the form of half-empty trucks and trains, idle machinery, and underemployed service professionals.

A profit opportunity arises in finding a way to get these products and excess capacity back into use. Demand appears for service providers that can transform excess inventory or capacity into cash flow. Struggling businesses and bankruptcy creditors looking to recover their investment capital actively seek ways to convert their idle capacity to cash. Shrewd entrepreneurs can broker, auction, or resell this excess inventory and idle capacity.

The business of “demand discovery” for unused products and services is open to anybody capable of matching buyers with sellers in return for a percentage of the sale. Although it is helpful to have an efficient inventory management system, all you need are inventory lists, a telephone, PC, fax machine, and contact database.

Because of the low cost of entry, trading excess inventory or capacity is most profitable for existing distributors with pre-standing industry contacts, purchasing and sales personnel, warehouses, trucks, and efficient inventory management and tracking systems. Instead of buying products direct from manufacturers, these distributors cut their cost of goods sold by switching a significant portion of their purchasing to excess inventory. Much of this excess inventory consists of buybacks and liquidation sales from their own resale customers at significantly discounted prices.

Before diving in to the inventory resale business, test the market for your selected product on one of the many online auction sites such as EBay. It is very important to focus on products that have the most profit potential. Focus on under-served market segments. Instead of PC hardware (a very mature market), focus on products where the resale market is not as mature and profit margins are higher.

The capacity resale business includes brokers and resellers. Brokers enter into service agreements and take a percentage of the purchase price as a representative of the seller or buyer. Brokers never take ownership or possession of the product, so their risk is minimal. However, getting long term clients, managing order flow, and not getting circumvented buy the buyer and seller can be major challenges as a broker. Resellers actually purchase products or services for their own account and resell them. Resellers tie up their own cash in inventory which is riskier, but there is no problem finding discounted inventory to buy during recessions and they tend to earn greater margins. Because of the simplicity of being a reseller, most small players take this route.