By Bridget McCrea
dispose of your excess inventory and avoid future surplus issues altogether.
A large order is cancelled at the last minute –
leaving you strapped with 100 units of something pretty far outside of your
typical product line. Sales forecasts didn’t exactly line up for the quarter –
leaving you with surplus quantities of an item that your vendor promised was a “sure
sale.” A product that you sold on a regular basis – and therefore stocked in
fairly large quantities – was suddenly deemed obsolete by the manufacturer and
replaced by a newer option.
Do any of these scenarios sound familiar or hit a
little too close to home? Regardless of what
caused the surplus inventory problem that you’re grappling with, the final
result is the same: you wound up with a few shelves stocked with SKUs that you
haven’t been able to sell during the normal course of business.
“Having surplus inventory lying around can be an
expensive proposition for distributors,” says Shawn Rohan, electric utility
manager for the Tennessee marketplace of Atlanta-based manufacturer’s rep
agency Whitehead and Associates. “It’s something that companies really need to
keep an eye on because surplus inventory increases overhead and idle stock
costs them money.”
Rohan says overstock management should play a key
role in the distributor’s overall inventory management strategy. Important
factors to consider include the products’ actual costs, the working cash that’s
associated with those items, and the expense of holding those items in stock
for a period of time. Those elements must be balanced against customers’ wants
and needs – an ongoing challenge for distributors across all industries.
“You want to make sure you have enough on the shelves
and/or in the warehouse at any given time to give customers what they want,” he
says, “but not too much to the point where the stock is sitting idle and
waiting for a buyer to come along.”
One of the easiest ways to manage surplus inventory
is to ward it off altogether. This can be achieved by combining solid
communication with customers and vendors with well-honed inventory and
procurement processes. Picking up on key buyer trends – like the fact that end
users are gravitating to a new type of light bulb or ballast, for example – can
go a long way in ensuring that you don’t stock up on “older” versions and
models. Talking to customers about their procurement plans for the coming year
can also help distributors better plan out their own purchasing decisions
rather than using the shotgun approach to ordering and restocking.
“Good communication really is the key to solving the
surplus inventory problem,” says Rohan. “When you know what your customers want
now, and when you can get an idea of what they’ll want in the future
(say, over the next 6-12 months), you can better plan your own inventory
strategy and avoid overstock.”
What happens when even your best intentions result in
a pile of unwanted lamps, cables, and converters that are now gathering dust in
the corner of the warehouse? Such situations call for more drastic measures,
says Rick Pay, principal at The R. Pay Company,
LLC, a management consultancy in Portland, Ore. “If you have inventory that’s
taking up physical space and/or tying up cash that can be used to invest in new
opportunities,” says Pay, “it’s time to find a way to get rid of it and put
that space and money to better use.”
Besides the cost of capital, Pay says obsolete
inventory can represent the largest component of cost in calculating the
expense of holding inventory – which can run as high as 3 percent per month.
Distributors can minimize these expenses by starting with the supplier that sold
them the goods in the first place. “Some suppliers will take inventory back as
long as the items aren’t too old,” says Pay. “The restocking charge you’ll pay
will be well worth it because the cost of holding inventory is usually much
higher than those return fees.”
Selling the goods is another option. Markets that
your firm doesn’t typically serve, other distributors, and online buyers are
all good selling targets, according to Pay. The latter can serve as a viable
way to sell surplus inventory on an ongoing basis. Electrical Distributors Co., of San Jose,
Calif., for example, maintains a page on its website that’s dedicated to overstock inventory.
On the page – which at press time was 13 pages long – the distributor lists
product descriptions, quantities, and physical location of the goods.
“The web can be a great tool in offloading inventory
to customers you wouldn’t otherwise be working with,” says Pay, who also
suggests area colleges, community groups, and even employees as prime targets
for either sales or donations of surplus goods.
And don’t overlook area recyclers that are always on
the prowl for materials. Pay recently worked with one company that – as part of
its new vendor managed inventory program – identified a large quantity of
obsolete inventory comprising parts made of valuable base metals. “Because of
the increasing commodity price of the metal,” says Pay, “upon recycling of the
parts, the company was paid more for the metal than it originally paid for the
Once the surplus items are offloaded, Pay says
distributors should set their sights on avoiding similar problems in the future
by taking a proactive approach to inventory management. “The root cause of
obsolete inventory is uncertainty in both supply and demand,” says Pay, who
points out that “uncertainty” pushes distributors to purchase more than they
need to avoid stock-outs.
Pay says sales and operations planning (S&OP)
tools, auto-replenishment systems (such as vendor managed inventory), and
strong discipline in new product introduction are three important tools in the
distributor’s fight against overstocks and surpluses. “Put these three tools together,”
says Pay, “and you’ll be able to avoid overstock while keeping your customer
base well stocked with what they need.”
© 2014 The Electrical Distributor. All rights reserved.