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Inventory Liquidation: You Can Be a Hero!

If you’ve ever been in charge of liquidating excess inventory, you know what a thankless job that is. No matter what you do, somebody’s going to be unhappy. Why?

  • First, and foremost, no matter how good you are at making the deals, you are never going to get all the money back!
  • Too much excess inventory points to bad purchasing decisions, and that can create internal friction and turn colleagues into enemies.
  • Chances are disposing of excess inventory isn’t your only responsibility — or even your primary job.
  • Whoever signs off on the disposition will always wonder if you could have negotiated a better deal.

A major change in the electronics industry is having a significant impact on excess inventory liquidation: The independent distribution industry has matured significantly over the last five years, mostly as a result of its increasing value in the supply chain and the levels of accounts now being served, particularly aviation, medical, and defense. Working with these industries has made it imperative for companies to have the tightest possible QC measures in place — and this includes materials sold as “excess.” So how can you make managing excess inventory — board level components and embedded computing products — a process that won’t burden you, create enemies, or look like you’re giving the material away? A few best-practices can take this job from “Too bad, you were in the wrong place at the wrong time” to “You’re on the fast track to Employee of the Year”!

Where to start? First, ask yourself, “How can I maximize my return?” The following are some things companies that are very forward thinking in their excess disposition strategies know and factor into their plans:

  • Date codes are important. Most excess is deemed valueless when date codes exceed 24 months.
  • Traceability matters. Maintain accurate records on when materials were acquired and from whom. Most buyers of excess want this information.
  • Buyers of excess usually expect the materials they buy to be available for same-day shipment.
  • When analyzing the value of your excess inventory list, most passive components should not be given a value. (There are a few exceptions.)

Once you’ve addressed how to maximize return, ask, “How do I get rid of my excess without having it take over my life?”

One of the first steps is to get agreement from senior management that excess inventory is an everyday business issue, not something you deal with every five years. With that key bit of business out of the way, you may determine that the best way to handle liquidating excess inventory on an ongoing basis will be to consign your material with a partner. If you choose this route, there are a few things you need to know before you enter into an agreement:

  • What insurance does a potential partner carry on material while in its custody?
  • Are its warehouses and staff ESD certified?
  • Is the facility where your materials will be stored humidity controlled?
  • Is your potential partner a qualified independent distributor that can give you an honest evaluation of your material in today’s marketplace? Ask it to analyze the list line by line for probability of sale.
  • Does your potential excess disposition partner have the capability to give you 24/7 access to the material via a secure server, so that you can track sales history, recall parts, and communicate with it?
  • Can the supplier manage excess both domestically and internationally?
  • Does the supplier has a dedicated team to sell this material?

Some additional best-practices:

  • When you’ve moved the initial backlog, set up a simple process to move excess inventory every six months to prevent material from piling up again.
  • Make documentation (traceability) available for as much of your excess inventory as possible and at least for high-dollar line items.
  • Give your partner the ability to sell material at today’s market value. This can fluctuate daily.
  • Avoid “front end” gimmicks that pay you to get control of your excess material. This kind of deal is not usually in your best interest in the long term.
  • Find out if your supplier can also move finished goods through alternative channels such as eBay, Amazon, and Overstock.

Excess material is always going to be a part of business. You can turn it into a proactive business process with six-month reviews and by transferring stranded and obsolete material for disposition on a regular basis. This will allow you to recapitalize your material while it has fresh date codes and is most likely to have the largest active customer base.

I’m sure that everyone who has had to deal with any aspect of liquidating excess inventory knows a few things about what works and what doesn’t. I hope you will all take a minute to share your experiences, challenges, and successes.

I look forward to your comments.

12 comments on “Inventory Liquidation: You Can Be a Hero!

  1. Barbara Jorgensen
    March 26, 2012

    Mark, I can't think of an occupation more fraught with risk than inventory liquidation. Companies don't like to admit they forecast incorrectly in the first place (or that circumstances changed) and then collect pennies on the dollar to get rid of the stuff. Partnering with a company that isn't going to exploit you certainly helps make a bad situation tolerable. That kind of trust is built up over numerous transactions (if not years). This is a great how-to guide on picking the right partner.

  2. Cryptoman
    March 26, 2012

    In the recommended model, it sounds like the partner needs to be quite capable to handle all the requirements of the inventory liquidation. Such service will probably come at a high cost which will further reduce the returns the owner of the inventory is likely to receive. Therefore, it sounds like there may be a conflict of interest between the two parties in such a model as both will be trying to maximise the cash they will receive. This can also undermine the key element of trust between the parties.

    How can this conflict be resolved? As Barbara also stated, a healthy trust relationship can only be built over many years and many successful transactions. Because of the commercial nature of this particular business, I am not clear whether such solid trust can ever be achieved.

     

  3. prabhakar_deosthali
    March 27, 2012

    Inventory liquidation if not done in time can turn out to be a monstrous job later.  It is the dead skeletons nobody wants to touch. Myself as an IT manager of a manufacturing company have seen how even the top bosses are averse to dealing with this issue.  From the EDP department it was our duty to bring out to the notice of the top management and the board of directors the non moving items.  Most of the time the operations managment used to somehow circumvent the subject.

    For electronics inventory the timely action is all the more important as the value of the stock diminishes by geometric proportion with time ,compared to the mechanical items.

    A clear cut company policy on automatic transfer of the excess stock to the dead inventory and a tie up with third party to liquidate the same will definitely help.

     

     

     

  4. Eldredge
    March 27, 2012

    Mark,

       Thanks for an excellent overview of an important, and often avoided, topic. You bring up a key aspect related to inventory date code – which points out that it is best to address excess inventory issues rapidly and aggressively once they are recognized.

  5. rohscompliant
    March 27, 2012

    as the old saw goes……”inventory is like fish……the longer it sits around the more it stinks!!!!!”

  6. bolaji ojo
    March 27, 2012

    Exactly. Conversely, though, some people have made a killing by selling inventory piled up in some warehouse that suddenly went into tight supply situation. It doesn't happen always but occasionally when it does, somebody smiles, happily.

  7. rohscompliant
    March 27, 2012

    To the owner of the excess it is 'fish'……to the buyer of the excess there will invaribly be nuggets of gold and boxes of rocks……one just has to have experience (lots of it) when buying OEM & CM E&O inventory…and lots of courage to fork over the cash….it is not for the faint of heart!……….If you are rigt 51% of the time you will make $$$!

  8. Ashu001
    March 28, 2012

    Guys,

    This just in from the Latest Durable Goods order Numbers(from the Census Buereau)

    http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

    Inventories have hit All-Time Highs in America.

    What does this mean for most Manufacturers???

    Channel Stuffing and an unprecedented fall in Profit Margins.

    Lot of people were hoping that Inventories would have fallen in line with an improving economy;Unfortunately it looks like the Economy is not improving fast enough for most manufacturers.

    Exports to Key markets in Asia and Europe are also going to be hit(because of Slowdowns/Recessions there).

    Regards

    Ashish.

  9. Ashu001
    March 28, 2012

    Prabhakar,

    I agree.

    Inventory Liquidation is the White Elephant in the room that nobody wants to touch.

    What I find most interesting is that inspite of having all the latest ERP and Supply Chain Infrastructure in place,most companies decisively fail to forecast demand adequately.

    I mean,we have Just in Demand Manufacturing in most Industries today;so why they forecast demand(within +/- 10%) accurately???

    Think about it,if we did'nt order/manufacture more earlier then would there be a need to do Inventory Liquidation in the first place?

    As my earlier post here says,We are facing All-Time Inventories today.Not  a Good sign at all for demand and manufacturers going ahead.

    Regards

    Ashish.

  10. B-Stock_Jimmy
    March 28, 2012

    Hi Mark and co,

    What are your thoughts on utilizing an online liquidation auction platform to manage liquidation inventory? It is definitely a very efficient model, and rewards the company with higher recovery rates. We've seen this work for for retailers like Walmart, Macy's, and Sam's Club, who partners with B-Stock Solutions to help build and manage a liquidation auction platform for them (Walmart Liquidations for example). This results in reduced overhead and improved recovery rates. It reduces the need to find the perfect distributor to work with, protects your brand, and makes liquidating to a hundreds of buyers as easy as it is to liquidate to one buyer. They also don't have to worry about building a buyer base, because they can tap into B-Stock's liquidation buyer network.

    Here's a quick video on how it works: http://vimeo.com/19337735

    Jimmy

  11. bolaji ojo
    March 28, 2012

    I like the analogy you used. Yes, it's rotten fish when you have unneeded stocks you can't move in the warehouse but it can become either dried fish (possibly eatable) or gold nuggets (definitely worth a bundle) if the third-party partner (distributor) can move it. Anytime an OEM or supplier has excess inventory it's a problem but for distributors it can be an opportunity, one loaded with dangers too.

  12. rohscompliant
    March 28, 2012

    Your model works great for finished goods geared toward the general consumer. But not so much w/ B2B when you are trying to move board level electronic components such as semi's, I.C.'s an passives. 1 or 2 generation old processors or memory devices and disc drives ( commodities) would fair better in your model.

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