For wholesale distributors, managing inventory effectively is essential for profitability, says Jon Schreibfeder, president of Effective Inventory Management Inc., and author of Achieving Effective Inventory, in Inventory: The Good, The Bad and The Ugly.

"We want you to be – to put it very bluntly – lean and mean with your inventory,” says Schreibfeder, who suggests separating inventory into the good, the bad and the ugly as a way of determining its profitability. “Your inventory is, in fact, just like a Clint Eastwood movie.”

Good inventory is what a company makes money on, bad inventory causes a company to lose money but is necessary to sell something else, and ugly inventory does not contribute to any other profitable sale nor does it make money for the company.

Schreibfeder says to divide inventory into good, bad and ugly categories, business leaders should calculate the adjusted margin, which takes into account the actual amount of inventory, rather than the gross margin. Most companies need a "minimum adjusted margin somewhere between 7 and 9 percent to be profitable," he says. 

Read about achieving effective inventory management in Inventory: The Good, The Bad and The Ugly.