One of the best ways for procurement agents to cut costs is by making sure the electronics products and parts that they order correlate with specific company needs, initiatives and ongoing maintenance requirements. This isn’t always easy in today’s fast-moving and fickle business environment, where a large job may be mothballed or a new project sent in a different direction overnight. With a new initiative to focus on, buyers often lose sight of the excess inventory—not to mention the end-of-lifecycle equipment and customer returns—accumulating in the warehouse.
“Surplus inventory can be a pretty expensive proposition for any company,” says Shawn Rohan, a manager with Atlanta-based manufacturer’s rep agency Whitehead and Associates. “This is an area that buyers need to examine because surplus inventory increases overhead, and idle stock costs companies money.”
For electronics buyers, reducing surplus stock can also serve as a cost-cutting tool. Not only does the practice free up warehouse space and dollars that could be better spent elsewhere, but it also helps to create an aura of best practices going forward (that is, once the surplus is gone, the buyer will work harder to make sure it doesn’t regenerate at a future date).
Time to liquidate
Calling management and disposition of business surplus, “a universal and expensive problem,” Liquidation.com says business surplus includes both excess inventory such as overstocks, customer returns and discontinued items and surplus operating assets such as idle technology hardware, plant equipment and capital assets. The annual volume of business surplus in the U.S. economy is significant, the company reports in Best Practices in Managing Returns and Excess Inventory, “with surplus being created by all participants in the supply chain: manufacturers, distributors, and retailers.”
According to Liquidation.com, customer returns represent 4% of retailers’ total revenues or $100 billion per year, and federal government agencies dispose of $8 billion of surplus assets per year. Most companies dispose of excess inventory and surplus assets inefficiently. As a result, Liquidation.com says companies and their stakeholders suffer from low returns on surplus disposal activities, high disposal costs—costs for warehousing, managing and shipping—and high opportunity costs (inefficiently allocating internal resources to manage the administrative burdens of this non-core function).
Managing overstock 101
Overstock management should play a key role in any buyer’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 that merchandise in stock for a period of time. Then balance those factors with users’ wants and needs before making any big decisions around liquidation and/or disposal.
“You want to make sure you have enough on the shelves and/or in the warehouse at any given time to give your internal and external customers what they want,” says Rohan, “but not too much to the point where the stock is sitting idle and waiting for someone to pick it up and use it.”
Another key consideration that electronics buyers should think about when it comes to selling surplus components is the prevalence of counterfeit items in the marketplace. Many organizations shy away from purchasing such components from unauthorized sources, not knowing if the merchandise is legitimate or not (in many cases, for example, factory new components are only procured directly from original manufacturers or their authorized dealers). Keep this in mind as you survey your firm’s surplus inventory and come up with ways to use it and/or dispose of it.
Sometimes it’s easier to head off surplus inventory than to try to dispose of it after the fact. For example, Rohan says one of the most effective ways for buyers to save money on inventory is by implementing solid communications with customers, users, vendors and any other stakeholders that rely on company stock to do their jobs.
“In most cases, good communication will be the key to solving the surplus inventory problem,” says Rohan. “When you know what everyone wants now, and when you can get an idea of what they’ll want in the future (say, over the next 6 to 12 months), you can better plan your own inventory strategy and avoid overstock.”
What to do
If, despite their best efforts, buyers wind up with shelves packed with unneeded items, Rohan says buyers should request either a sell-back (selling back to the vendor at a discount) or trade-off (trading with a vendor for another, equal-priced item that you need now) arrangement with their suppliers. Other disposal routes include sales via online exchanges (when applicable), recycling the goods, setting them aside for future jobs, encouraging employees to use the items first (before placing new orders), or even donating the merchandise to a local charity or non-profit organization.
Once the goods are gone, use your best advance planning and communications to keep those surplus items from piling up again.
“Stay in close contact with the engineers, operational employees, or other individuals in your firm,” says Rohan, “who know the production schedule and what they need. They’ll be your secret weapon when it comes to only ordering the necessities and avoiding surplus inventory altogether.”