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When Taking Less Is Better

Without question, most electronics manufacturers and parts vendors have all been solicited for their excess inventories by multiple entities, many of them using the same tired “shtick” in their approach.

Along those same lines, we've all received offers on our excess inventory — whether it is for an entire lot or a specific part — but the offer was deemed to be too low, far below market value, or downright insulting. Which begs the question: “Why sell excess for pennies on the dollar and let the broker get rich?”

A sale, at its very core, involves people making a profit. Everyone is in the game to make a buck, including a manufacturer who produces processors at a cost of $1 per unit and has a resale of $2 per unit, the authorized distributor who re-sells them at $2.50, or the broker who purchases them from the open market at $2 and re-sells them at $4.

We can all agree that excess inventory is product that is either overstocked, obsolete for new designs, or was purchased for a production run that never met its expectations. Regardless of how it became classified as excess, the fact remains that these are parts that the seller currently cannot use.

In our industry, when it comes to the open market and excess inventory, perception is king. When you search for a part and find dozens of listings showing availability, you have options before you, and you're going to shop around until you find the lowest possible price. As noted in a previous article, the open market is full of pitfalls that buyers need to be aware of; buyers should try and learn how their supplier is sourcing product, qualifying their suppliers, etc. The same applies when you are selling product as well. Ask: How is the company I am working with to sell my excess parts actually marketing my inventory? (See: Pay No Attention to That Man Behind the Curtain….)

A number of companies use the same tools to market and solicit interest in excess inventory, including the various industry search engines that you may be familiar with and use on a daily basis. This is the extent of their marketing efforts. Other companies, such as Virtual Chip Exchange, while they use many of those same tools, are also engaging other OEMs who have used those same parts (or a similar product) previously. It is this “direct marketing” effort that can bring you the highest possible return on your excess stock.

Okay, that's great and all, Jack, but you haven't answered the question: “Why should I take pennies on the dollar and let the broker get rich?” Simply put, it's the perception of the available supply in the market. When the perception is that there are thousands of parts available to be purchased, buyers are going to look to take advantage of that, and rightly so.

Let's say that you have 5,000 processors in your warehouse that you have no use for. You bought them from the manufacturer at $2 a piece two years ago. You sent your list of excess out to 10 brokers in different countries and different time zones, figuring that the more exposure you can get, the better. There is a buyer out there looking for 5,000 processors, and it has a target price of $0.30 — a very low target price, but with so many parts perceived to be available in the open market, this is a price the buyer believes it can get.

One of the companies that you sent your excess list to comes to you and says, “We have someone who is willing to take all 5,000 processors that you have in your warehouse for $0.20 each, would you like us to accept their offer for you?” Having paid $2 each for the parts and knowing that they sell for $2.50 through authorized franchise channels, you tell the broker, “Absolutely not, we need to get close to what we paid for them.” Privately, you are steaming mad that the broker is apparently trying to take advantage of you by offering such a low price.

The customer continues shopping until he finds someone willing to take pennies on the dollar, and you miss a chance to get rid of those parts, leaving you sitting with inventory that you cannot use and may not have an opportunity to sell again for weeks, months, or years. It may get to the point where you end up throwing the parts in the dumpster because you simply need the room.

Inventory that sits on a shelf collecting dust does nothing to help your bottom line. Taking pennies on the dollar is oftentimes better than taking nothing at all.

4 comments on “When Taking Less Is Better

  1. Jay_Bond
    October 4, 2011

    It is nice to see an article that is stating what you would think to be obvious thinking, “money earned is better than money lost.” It is amazing how many companies I've dealt with that do not realize that selling something at a loss, particularly unused inventory gathering dust, is better than taking up warehouse space collecting dust only to end up in the dumpster. If some of these individuals would just come to terms and accept the loss they would be better off.

  2. Anand
    October 7, 2011

    @Jack thanks for the interesting post. You have highlighted some of the key points regarding why sometimes its necessary to  take pennies on the dollar. But what if the broker is trying too hard to reduce the price, how much flexbility does we have to bargain for the right price ?

  3. Ariella
    October 7, 2011

    A reminder of the rational laws of supply and demand versus the irrational tendency to cling to what we believe is the right price.

  4. Jack Schumann
    October 7, 2011

    Hi anandvy ,

    As the owner of the inventory, it is always your decision to either accept or reject the price being offered. You need to balance the necessity to sell parts that no longer has a value to your company vs. the financial loss that the transaction will cost. Working with a trusted partner will give you the best opportunity for a mutually beneficial solution. As I mentioned in the post, perception is key. By listing your excess with multiple brokers, many who use the same marketing outlets, it gives a false perception that there is a large supply available. As we all know, when there is an over abundance of supply, the price will deteriorate, even when the “over-abundance” is perceived and not real.

    The importance of limiting the number of people that you market your excess through and working with one or two trusted partners (like Virtual Chip Exchange) cannot be over emphasized.

     

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