Excess and Obsolete Inventory

 

Excess and Obsolete Inventory

What is Excess and obsolete inventory:

Excess inventory is a stock of materials or products that have exceeded the projected demand for a certain time frame. Generally, if the stock of a certain item is covering more than the forecasted demand of 12 or 24 months, then the quantity more than the forecasted period is considered as excess inventory quantity. This timeline depends on the policy of the organization and therefore, varies accordingly. What are the different forms of Inventory?

Obsolete inventory is the inventory or materials available in any system where there is no demand for a prolonged period. This timeline is also defined by the organization and it differs as per the policy (typically for at least 12 months). This means it has not been used in any production to make any finished product or sold to any customer in any form. It is also advisable to check the forecast of these items during the ABC analysis.

There may be several reasons for generating this excess and obsolete inventory like the end of the product lifecycle, inaccurate forecasting, change in customer demand, and many more. Excess and obsolete inventory is always a burden to the business and has a big financial impact. At the end of the year, either you have to sell it off at a lower price or do a write-off which is also a loss to the business.

E&O Inventory reason

 Cause of Excess and obsolete inventory:

 1. Poor demand forecasting:

Inaccurate forecasting is one of the key reasons for excess and obsolete inventory. The poor inventory replenishment practice leads a business to carry this E & O inventory. More stock than demand requirement must be analyzed and reduced accordingly, else this will become obsolete or deteriorate in the longer term.

 2.      End of the product lifecycle:

As the life-cycle of the product reaches its end, the sales will start to fall and accordingly, the demand forecast will also reduce. In the manufacturing environment, the consumption and after-sales services will also reduce.

 3.      Sudden change in policies:

Due to sudden changes in government policies, like environmental policy, export-import policy, the sales products and consumption of components may change creating excess and obsolete inventory.

 4.      Drop in customer demand:

Due to the change in customer requirements or specifications, there is a chance of generation of excess and obsolete inventory.

 5.      Poor review mechanism of ERP planning parameters:

The MRP parameters must be reviewed and updated after specific intervals to generate correct material requirements. Because of the change in demand forecast, customer requirement, and other parameters, the safety stock, re-order point, EOQ/MOQ must be reviewed and changed else the ERP will generate purchase requisition or planned orders as per the old data which may not be appropriate as per the current scenario.

 6.      Excess buying to take quantity discount:

Often to take the quantity discount, bulk buying is recommended. But, if the requirement decreases or is canceled, the whole idea creates an E&O inventory. This step should be taken after proper review of the order in pipeline or forecast.

      7. A desire to ensure 100% stock availability

8. A complex supply chain

8. Poor decisions

Business problem

 Why Excess and obsolete inventory is a business problem:

     1.      Inventory ties up the working capital which can be used in any other priority project like business development, research, and development, new product launch. E&O inventory also affects the balance sheet.

2. The higher the inventory, the more space is required to store it in your warehouse. And as we all know that the inventory carrying cost is a big chunk of the total inventory available, this also consumes a good amount from your profit.
3. The ultimate result of excess and obsolete inventory is to sell it off at a low price or write it off. In both cases, the bottom line of your business is affected badly.
4. A high E&O inventory also results from a poor Inventory turnover ratio.
5. You need to invest your time and resources to manage the E&O inventory which can be used in other productive work.

Management

 How to manage Excess and Obsolete inventory:

Inventory is a necessary evil. But it is now very much obvious that excess and obsolete inventory is killing the growth and profit of organizations. Therefore, the important question is how to manage inventory? What are the important steps that need to be taken to avoid the generation of E&O inventory?

 1.      Create awareness about inventory among your business people:

People are the key asset of any organization and the movement of inventory (from Raw materials to finish goods) depends on them. Therefore, it is very important that your people should know about inventory. What is Inventory Management, how inventory is affecting the profit and loss, what is E&O inventory, how it is generated, and how to manage it? People should be aware of the inventory policies, DOA regarding the inventory, Inventory norms.

 2.      Evaluate every business decision affecting inventory:

The decisions which are going to affect your inventory should be evaluated thoroughly before the conclusion. It may be a new product launch or any engineering change, end of life inventory, tooling, warehousing, supplier qualification, vendor-managed inventory every aspect must be explored and taken into consideration.

 3.      Periodic review and update of MRP parameters:

It is very much important to understand the working procedure of your ERP system. And therefore, the MRP parameters like Safety stock, Re-order level, MOQ/EOQ, lead time must e reviewed periodically. These parameters depend on the future forecast and order in hand, which changes from time to time.

 4.      Close coordination between Sales, operation, and planning:

Effective and close communication between the sales, operation, and planning is one of the key actions to control the generation of E&O inventory. Accurate forecast, real-time communication, forecast close to the customer demand can help to manage the E&O inventory.

 5.      Clear ownership and accountability:

There should be a clear-cut focus on the inventory status, especially on the E&O inventory. There should be specific people who will be accountable and answerable for the status and they must be empowered to take proactive and quick decisions.

E&O Management

 How to deal with Excess and obsolete inventory:

As the industry and the supply chain is very much flexible and fluctuating, there are so many challenges in supply chain also. Generation of E&O inventory is also, therefore, almost unavoidable. Hence, there must be a focus to deal with these in a specific way.

 1. Sales promotion:

This option can help to reduce the E&O inventory by improving the sales through some discounted price.

 2.      Modification to usable condition:

The idea of modification of the excess or obsolete part or component to a useable part can also, be explored.

 3.      Sell to stock surplus specialists:

There are people who deal with the surplus materials and arrange a sell-off. In this way, with a lower price, E&O inventory can be dissolved.

 4.      Find a new market place:

There is always a possibility that the same materials r components can be used in other areas, factories, states, or countries. In many cases, this can be a good option where you can get a better price.

 5.      Write off:

The last option is to write off the E&O inventory. It is very much important to keep the system healthy. Therefore, periodic system clean-up is also required.

 Conclusion:

As it is said that Inventory is a necessary evil, Excess and Obsolete inventory is definitely evil. It can be detrimental to the growth of any organization. Therefore, exploring proactive ways to prevent the generation of E&O inventory can bring great benefits like better working capital, better space utilization, improved ITR (Inventory turnover ratio), less inventory carrying cost, and many more.