It is no secret that the economy looks awful right now. It seems that no matter where you turn there is more bad news. Unfortunately, I think focusing on the negatives causes us to lose sight of the positives.
In conversations with contract manufacturers I have discovered that this year has been decent over all. For some, it has been a year of significant growth. This clearly indicates that it is possible to do well even in a down economy.
Times like these are perfect for reviewing current processes and procedures to see where you can become more profitable and efficient.
The last survey I sent highlighted one of these areas. Sixty percent of respondents indicated that 26-50% of the on-hand inventory value is excess inventory. While it is impossible to completely avoid excess inventory, this number can and should be significantly reduced.
Because it is a vital subject, this issue will discuss sources of excess inventory and ways to dispose or reduce the inventory.
Don't forget to checkout the redesigned "Make YOUR Mark" and all new "In You Own Words" sections. Please take a moment to review the topics and provide your insights. This way the case solutions will have even more value and application to your business.
As always, we look forward to your participation and feedback as you gain new insights and become a more effective provider of Electronic Manufacturing Services.
Sincerely,
David Sharp
ManEx, Inc.
Business Case - Inventory Control
Excess Inventory
North Eastern Company* (N.E. Company) recently noticed a steady increase in their on-hand inventory. While sales increased over the same period, they also had a rapid decline in the number of inventory turns per year. Management suspected this is from a build up of excess inventory and asked for a full review to be sure.
The analysis confirmed that 43% of on-hand inventory was unusable. Additional study indicated that the sources of excess inventory were: purchase minimums, poor MRP setup, customer design changes, and fluctuations in demand from their customers.
How can N.E. Company reduce the amount of excess inventory purchased? How can they quickly and efficiently reduce the excess inventory already on hand? What can be done to minimize the impact of customer demand fluctuations on inventory turns and therefore cash flow?
* Company name has been changed.
Business Case Solutions
To most effectively manage excess inventory, you should purge what you can, prevent excess inventory as much as possible, and prepare for handling what you cannot prevent.
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In YOUR Own Words
EXCESS INVENTORY
"We created ourselves as a vendor. All excess inventory is then removed from ICM and placed on a PO with us as the Vendor. If we ever have a need for the excess inventory we simply receive it in and use it. Otherwise, it just sits on the PO and off of our books.
[One issue is that] the POs created constantly have actions to cancel and/or reduce the quantity when viewing in MRP.
We have tried using an excel spreadsheet, but it is not efficient as using the above method."
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1.1. Business Case Solutions - 11 - Excess Inventory
Business Case Solutions
To most effectively manage excess inventory, you should purge what you can, prevent excess inventory as much as possible, and prepare for handling what you cannot prevent.
PURGE
If excess inventory has already reach excessive levels, any or all of the following can bring levels back within acceptable limits.
Return to the supplier - if the packages have not been broken and the parts are not NCNR, perhaps the supplier will accept a return of the components. While this may not be possible, it is a good first step to see what can be done.
Use on existing jobs - Where possible consume the inventory on other projects. This has the potential to not only reduce on-hand inventory and purchasing requirements (by reducing the number of parts to purchase), but can also strengthen the relationship with the customer by demonstrating your proactive approach to reduce costs and increase efficiency. To make this as easy as possible, you will need a good method to consolidate demand, or identify possible uses across projects, and may require you to transfer the inventory between part numbers.
Sell to customer - Where possible and reasonable, customers should pay for excess inventory purchased exclusively for their projects. To make this easier, you will need a way to quickly identify all parts purchased for the customer, expected demand and residual, and overall cost for the parts. Armed with this information, you can approach the customer about paying for the extra parts. However, before you ask the customer to pay for parts, suggest a better alternative of placing additional orders to consume the parts in production. In many cases, this will be a win-win solution by allowing you to reduce excess inventory through sales and the customer to sell extra products rather than sitting on components.
Sell to others - If you cannot consume the inventory on existing or new jobs, and the customer will not pay for the extra parts, then you have a few options for selling the parts to others. You can sell directly or by consignment through companies like 4 Star Electronics*,Conversion 2*, and many others* (as an aside, going to these sources may be a good way to find hard to find and obsolete inventory). You can also attempt to sell directly to other companies by listing excess inventory for sale on your website.
Write-off unusable inventory - If you cannot return, consume, or sell the excess inventory and you do not expect to have demand for the parts in the near future, you can write-off the inventory to get a tax benefit, increase warehouse space, and reduce handling costs incurred by indefinitely holding the parts on your shelves.
PREVENT
Reducing on-hand excess inventory is an important step, but will only become a long-term solution if buyers are able to prevent additional excess inventory. Four simple actions can help keep excess levels in check.
Verify MRP setup for each component- MRP will instruct buyers to purchase according to user settings. If component minimums, lead times, order policies, and other MRP settings are incorrect buyers may inadvertently purchase excess inventory. Simply reviewing and correcting system settings for each component (especially those with high unit prices) can have a positive impact on residual inventory.
Consolidate demand - When the cost of sitting on excess inventory offsets or exceeds the convenience of extra reels and components, users should consolidate demand to reduce total parts purchased. This will ensure excess inventory never exceeds a purchase minimum for any given component and values are within acceptable minimums.
Monitor projected excess - Periodically checking expected excess inventory provides an opportunity for buyers to verify they have optimum purchasing settings. As business changes over time and component requirements increase and decrease, buyers may need to adjust MRP settings. Projected excess reporting is a useful tool for identifying when to make the changes.
Calculate residual in quoting - Getting the most competitive pricing is an important part of the quoting process. However, sometimes the lowest unit price is not actually the best option for a competitive bid. Especially with smaller build quantities, quoting a higher price with fewer excess parts can result in a lower overall cost.
PREPARE
Knowing that excess inventory is a part of the industry and cannot be completely avoided allows for companies to appropriately prepare.
Customer Contracts - With experience, it can be easy to identify projects with high potential for excess inventory. Contractually preparing for that possibility can simplify handling the inventory as needed. It is common for the contract to contain provisions for acceptable levels of excess inventory and time limits for consuming that inventory. Once the inventory reaches contractual limits the customer would purchase the excess either through additional orders, or as components.
*Company names are provided for example only and are not endorse by ManEx.
1.2. ManEx Solution - 11 - Excess Inventory
ManEx Case Solution
ManEx provides several tools to allow users to purge, prevent, and prepare for excess inventory.
REPORTS: Standard reports will allow users to identify parts without an assigned BoM, parts that have had no transactions as of a given date, and parts allocated to closed jobs. If parts are allocated to a project in the purchasing process, then users can see all parts on hand at any given time purchased for that project. Additionally, users can create unlimited custom reports to better control excess inventory.
MODULES:
Project - This module allows users to allocate parts to a project, which not only controls how the parts are used, but also provides accurate and complete on-hand values for those parts and the project. In-Plant Stores - This module is commonly used to manage excess inventory purchased by the customer that will be consumed at a later date. This allows visibility and accountability for the parts and keeps the inventory value off the books until they are used in production. Quote - This module allows users to identify excess inventory in the quoting process. With this information, users can establish contracts with the customer to account for the excess value and reduce its impact on cash flow. It also provides visibility of existing part numbers and inventory so users can consume existing inventory before purchasing more. Inventory Control - This module allows users to consolidate demand by managing one internal part number to multiple supplier, customer, and manufacturer part numbers. It facilitates part cross referencing to quickly identify other internal part numbers that may be used as an alternate. It allows users to calculate and track the EAU for a given part. Import - This module identifies existing part numbers allowing users to decide if they want to consolidate demand, or keep them separate. Forecast - This module allows users to systematically monitor and enforce demand fluctuations according to contract limits. When the user uploads the latest forecast, it will adjust existing demands by acceptable limits allowing for a more steady flow of material. Any changes outside of the agreed upon limits are identified and will require user intervention ensuring these changes do not go unnoticed. ECO - This module allows users to document and track changes to an assembly. This way they can see when AVLs were added or removed and more fully investigate the impact of these changes on excess inventory. Users can also prepare a quote for the cost of the change within the module, keeping all information together, and helping to control excess inventory levels.
CONCLUSION
NE Company was able to quickly reduce on-hand excess inventory by returning a portion to the suppliers, using approved parts on other orders, selling parts through consignment, and selling a portion to the customer. They estimate that 27% of their on-hand inventory is still excess, but their steps to update system settings, consolidate demand, and monitor projected excess inventory levels should allow them to bring that down around 19% over the next six months. Management decided against writing off excess inventory, at this time, because a significant portion of the excess inventory is on the AVL for a job currently in quoting and for which they hope to get an order later this year.
They have also taken steps to manage excess inventory as it arises. They established contracts for excess inventory with their customers. They have the Project Module and In-Plant Stores Module operational allowing them to fully track inventory levels and values, and invoice as needed. NE Company also created a customer statement* that provides an overview for the total customer liability. By providing this statement to the customer each month, both parties understand total liability and responsibility at the component, assembly, invoice, and order levels.
*an example of this customer statement can be provided upon request.
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