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.
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  1. 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.
  2. 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.
  3. 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.
  4. 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.

  1. 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.