Advertisement

Blog

Avoiding Inventory Overload

As chief procurement officer for {complink 3858|Nortel Networks Ltd.} during the downturn in the optical business in 2000, I had to preside over the management of billions of dollars of excess material. This is not something I ever want to have to do again, and I am sure none of you want to do it, either. Nevertheless, this experience flashed through my mind when I was asked by EBN editors to participate in a forthcoming Webinar on inventory management and how companies can develop plans to avoid piling up excess inventory. (See: Highwire Act: Inventory Balancing Between OEMs/EMS Providers & Suppliers.)

As you know, by the time you find yourself with significant excess inventory, it is too late to do much that is elegant. It really comes down to pain-sharing among you, your customers, and your suppliers. If you are in pain-sharing mode, try to balance the pain. You could easily put a weak supplier out of business if you force it to take back inventory — with threats of no future business — when it can't afford this. I would hate to see you with good inventory turns and a failing sole-source vendor.

The best way to avoid excess inventory is not to get it in the first place. Lean techniques, improved systems, and closer customer relations all work in favor of better inventory management. But even when these things are available, some companies get things horribly out of sync.

I see some amazing things from my vantage point at Freebenchmarking.com. Since inventory is the sum of all the units times their prices, there are only two things you need to get right to get inventory right. One is the quantity, and the other is the price. It's bewildering why good companies often fail at both. Also, most people don't think of price as a big factor in inventory until they are conducting revaluations.

When companies submit their data for analysis to use, they provide information on both pricing and quantity. We see the vast majority of companies having quality problems in their data and no one having the best price all the time. Data quality impacts quantity in a number of ways. One way, which is not very obvious, is coding duplication — where customers buy parts under two different client part numbers. They can easily be buying unnecessarily when they already have an excess in the same components by another name. This is very common when company growth has been achieved through acquisitions.

Other problems stem from missing data or incorrect entries. These problems usually can be traced to non-integrated systems or a lack of attention to detail. Poor detail management can be within a company or in the way a company manages contract manufacturers. In any case, get the number of units wrong, and you have shortages or excess.

It's a little different with price. With units, systems integration and eliminating coding duplication are tough challenges requiring management, coordination, and often significant investment. I can understand these constraints allowing only a limited response. But price inaction, as near as I can see, is beliefs-based, and until someone sees that the pricing is not competitive, it will remain unaddressed. Too many believe they are getting the best prices, and they all can't be right. I will share a secret with you: Many companies with revenue of more than $1 billion per year think they have the best pricing when they don't, and most companies with revenue of less than $1 billion think they have an excuse (volume) for not getting better pricing, but they don't.

Let's assume that you have $10 million in inventory, and your pricing is 50 percent too high for the size of your company. If so, you really have only $6.6 million of inventory. You have wasted about $3.4 million of cash, lowered profits, and understated turns. How realistic is it that you could be paying 50 percent too much for electronic components?

Within Freebenchmarking.com, we have price distributions on all components in our database. I have analyzed the price range for each component in the database and expressed the price range as a percentage of the best price in the database for each component. I have summarized some of these calculations in the table below by showing the average for each component commodity group.

Are you overpaying for components?

Let me know if my thinking is realistic.

Note: The EBN Webinar will take place at 2:00 p.m. ET on November 2. Speakers include Ken Bradley, president of Lytica Inc., Charlie Barnhart, founder and principal of Charlie Barnhart & Associates LLC, and Bolaji Ojo, EBN editor in chief. The Webinar will discuss issues facing manufacturers as they struggle to balance demand and supply without crossing the line into excess territory when ordering components. Click here to register.

14 comments on “Avoiding Inventory Overload

  1. DataCrunch
    October 27, 2011

    Hi Ken, very good points and you are so right on best pricing.  I have seen smaller companies get better pricing than the much larger companies just by being able to piggyback off  larger company’s volumes for components.     

  2. Himanshugupta
    October 27, 2011

    The project managent can be very crucial to prevent any excess or shortage of inventories. If the project managers take into account the risk factors and plan accordingly then the procurement officers can manage their inventories for any excess demand and supply better.

  3. AnalyzeThis
    October 27, 2011

    Ken, I'd ask you for more details about how you dealt with the Nortel situation… but I wouldn't want to dredge up any possibly traumatic memories…

    Anyhow, as you say, the best way to avoid excess inventory is to not acquire it in the first place. But sometimes this is easier said than done; an unexpected chaotic event can sometimes leave you sitting on a pile of inventory despite your best-laid plans.

    That being said, you did point out some very common pain points: duplication is amongst the many problems involved when you grow through acquisitions; this is a problem I've witnessed many times. Yes, I know there are numerous difficulties of integrating systems when you absorb another entity, but you really can't understate the importance of getting everyone on the same page as quickly and as accurately as possible.

    Also would like to echo what Dave said regarding pricing: you shouldn't make assumptions on that based on your company size.

  4. Taimoor Zubar
    October 27, 2011

    I agree that companies should be cautious in preventing excess inventory but sometimes planning can fail (or it might be some other external reason) and there's a situation where the company has an inventory overload. What would you suggest are some of the best practices in dealing with that?

  5. Ken Bradley
    October 27, 2011

    TaimoorZ, I will be giving examples of actions you can take with excess inventory in the Nov 2nd webinar. 

  6. Houngbo_Hospice
    October 27, 2011

    @ken:

    “I will be giving examples of actions you can take with excess inventory in the Nov 2nd  webinar. “

    I will be looking forward to that.

    My guess will be if this happens you just accept your lost and move forward and try to plan well next time. But sometime an “  excess inventory  ” can put you out of business. Right?

  7. ThinkNThanks
    October 27, 2011

    Always have a backup plan on excessive inventory; your competitors can help to dilute your inventory at lower cost than their suppliers. Your competitors can be your good friends too J

  8. garyk
    October 27, 2011

    Inventory overload has to be contolled by the CM'S. It's a flow up problem. The manufacture buys the materials, manufacturing equipement ( a large investment) and support persoanal to support the Distributor demans and in some cases the CM'S. When the CM pull in or push out orders or cancell the orders, this is what causes the overload. Every one is trying to support the CM'S requirements. The CM really doesn't care what it takes to receive product on time, they just want the product.  Lets not forget, cost down evey 6 months or so.

    I don't think this well be a big problem in the future for Distributors, China CM'S have started to use only manufactures and China distribution hubs to delivery product to the various CM's in there areas. 

  9. prabhakar_deosthali
    October 28, 2011

    The problem of excess inventory is faced by almost every company some time or the other -whether it is due to the overcommitment by the sales dept for a products sale, a project abandoned just before the product introduction into the market, cometitor's product available at a cheaper price or some such reason.

    The important thing is how quickly a company arrives at this conclusion that there is an excee inventory which needs to be disposed off  and  how quickly the company is able to dispose it off even at a lower than the current market price and save on the indirect overhead of maintaining that inventory.

  10. Eldredge
    October 28, 2011

    Minimum buy requirements  and obsoleted components also are factors than can contribute to excess inventory.

  11. Ariella
    October 28, 2011

    Good point, Eldredge. I imagine that it the minimum buy requirements could be subject to negotiation, though. If a business finds it tends to be stuck with excess as a result of purchasing a minimum that exceeds its needs.

  12. Jack Schumann
    October 28, 2011

    Hi Ken,  

    A very insightful article.

    As the Director of Excess Management Services at Virtual Chip Exchange, I see inventory problems daily. As some of the comments point out, there is not just one way that inventory becomes excess. The bottom line is you have it, and don’t want it any longer. This is where a trusted business partner that specializes in solving the problem can provide immense help.   

    Your article specifically mentions “coding duplication” – where customers purchase parts under two different client part numbers. We see this on a daily basis and have developed our Omniseach program for situations like this. While is seems to be most successful in large, multi-plant operations, any organization with more then one manufacturing facility can benefit from it. Once the excess is listed with us, all participating divisions within a company can see and access excess inventory from across the board. This quickly helps to reduce duplication and additional, unnecessary costs.

    The “timing” that you mention is accurate, but with an emphasis on the fourth quarter/end of year. Now is when many companies approach us to help move their excess inventory, generally with a sense of urgency as they absolutely do not want it on their shelves or books at the end of the fiscal year. Excess inventory management should be an ongoing process throughout the year—when you realize that you have excess inventory, deal with it promptly. Waiting too long not only puts your product at a great risk of becoming obsolete and/or replaced by a newer, faster, lower power part, but it also has a greater chance of losing value to potential buyers.

      We work with our customers throughout the year, reminding them to be pro-active in dealing with their “problem”. As such, we occasionally send reminders like this one, broadcast to our members last week:

      Trust is the basis of every good business relationship.

    Whether reported in TIME Magazine, Business Week, Forbes, or in the semiconductor industry press, the core values of VCE Virtual Chip have remained unchanged since the 1990s; to be Honest, Fast & Fair.

    Especially now, when many companies want to turn their excess inventory into cash, a trusted partner makes all the difference. We provide honest market feedback, resulting in a fair price for your excess stock.

    If you are facing year-end with excess inventory you need to eliminate and do not have a trusted supplier to go to, feel free to contact me for an honest evaluation of your situation.

  13. Eldredge
    October 31, 2011

    @Ariella  – You're right…and min buys probably are not usually the major cause for inventory problems. But, as you point out, it ids a factor that should be managed.

  14. electronics862
    October 31, 2011

    Thanks for the post ken. The Inventory overload can be avoid by having a perfect knowledge of market standards, and to have price variations to attract new buyers. It can be overcome by good project handling and to mee the market requirements in quality.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.