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Tackling the surplus inventory problem

Published 6/7/2014 10:29:59 AM

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By Bridget McCrea

How to 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.”

 

First Things First

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.”

 

Offloading the Goods

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 parts.” 

 

Tools of the Trade

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.

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Sound Advice - 'This can be achieved by combining solid communication with customers and vendors with well-honed inventory and procurement processes.' Manufacturers, Distributors, and customers must all employ better practices to allow inventory to adjust based on real time market demand. We need to leverage technologies that are available today and ensure that the data shared is of high quality (complete, timely, accurate, easy-to-use, consistent, standardized and synchronized) to keep having the right products, at the right time.

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