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It’s no secret that every manufacturing organization has excess MRO inventory sitting around. Machinery is phased out making parts obsolete; excess inventory is purchased by mistake; inventory gets lost or buried and forgotten about. No matter how it happens, excess inventory takes up valuable warehouse space and costs you money.
So how do you tackle this challenge and dispose of that unnecessary overstock?
Identifying excess inventory
First things first, you’ll need to clearly identify which parts are indeed excess and are safe to remove from the facility. This can be done through a detailed analysis of purchase and usage data. Typically the items of interest are those purchased or issued at least once during the analysis period (12-24 months) that have an on-hand quantity that exceeds the maximum inventory stocking level specified. You’ll want to consider:
How much stock do we have for this item?
How frequently do we need to use this item?
How much lead time is there to purchase this item?
Essentially, you’ll break down your inventory into categories to determine what is necessary and what is obsolete or excess.
While this sounds simple–“just look at the data!”–it requires first having usable purchase and usage data. The beginning of this initiative might also be a time to consider how you’re collecting data. Do you use an ERP? Are employees consistently entering data? Is there anything missing? Are there any breakdowns between data entry and usage?
If you’re realizing that your inventory is not properly accounted for, IMA can help with physical data capture. Or if you have the data but it’s not consistent or usable, IMA offers industry-leading Material Master data cleansing services that will transform your data into actionable content. You can learn more about how IMA can help you on our information page.
Disposal considerations
After you have determined exactly which items are in excess and safe to remove, there are several inventory disposition strategies to consider. Ultimately, the inventory disposition strategy that you choose to implement will be determined by a few different factors:
Resources Allocation. Essentially, the amount of time your employees can spend on disposing excess inventory items will affect what methods you choose as some methods require more involvement than others.
Timeline for Disposition. Like some methods require more effort and time from your resources, they also take more time in which the inventory is sitting in your warehouse. Consider how quickly you need the items removed.
Dollar Value Expectation. You also need to consider how important it is to receive compensation for the items you’re disposing of. Methods that are faster and less resource intensive are not going to return as much of your investment. Some methods may even require you paying to have items disposed of, which requires some determination of whether the cleared space is worth the possible expenses.
As you can tell, these factors have to be used in conjunction and weighed against each other. For example, if having a quick timeline matters most, you may need to allocate more resources and accept that your dollar return won’t be as high.
Disposal strategies
The following are a few of the disposition strategies that you may want to consider:
Attrition
Corporate internal redeployment
Supplier buy-back
Auction
Third-party liquidation
E-commerce
What you choose will depend upon the factors discussed above as well as your own needs.
Attrition
The purpose of attrition is to gradually use down or remove excess stock. As such, it’s a natural first consideration for most organizations–specifically if the excess stock is all inventory that is still applicable.
Based on the analysis of your purchase and usage data, average daily usage of different items can be calculated. Using this number along with other inventory variables, you may estimate the time that it will take for excess inventory to be used down to an optimal stocking level. In that time period, you will also need to ensure the specific inventory items are not repurchased.
While this strategy doesn’t deliver cash returns, it does use up items you already have so you do not spend more on the same parts. In the process, you will use down excess inventory to an efficient stocking level, reduce carrying costs, and free up warehouse space.
If the attrition timeline is estimated to exceed a certain amount of days or months (as determined by your goals or needs), you may want to consider a different disposition strategy that can produce quicker results.
Corporate Internal Redeployment
Another strategy that does not directly deliver cash returns is to transfer excess inventory to other sites within your company. Like attrition, the goal is to find a use internally for the parts you have and thereby reduce the need to purchase additional inventory.
In order to make this strategy successful, you must identify other sites within your organization that the specified excess parts are used in. Based on usage activity and on-hand quantities at those sites, you can then determine a timeline for usage. Does the other site have plans to purchase this part in the near future? Does it make sense to put another site in an overmax state if the parts will be consumed in a short period of time? There are many variables to consider with this strategy but if implemented properly, it can deliver great benefits to all sites involved.
Supplier Buy-Back
Supplier buy-backs are always a successful disposition strategy and can often become a great negotiating factor within a supplier tendering process. In many cases, suppliers may agree to purchase the excess items which fall into their product groups for cash or credit towards future purchases. For example, a bearing and power transmission supplier may agree to purchase any excess bearings, belts, etc. that are new in the original unaltered box. So if you’re planning to tender out your MRO spend, this is a great strategy to keep in mind during negotiations.
This can also be a good fit for your organization if you are trying to eliminate excess stock fast or if the stock you’re getting rid of includes parts that your organization no longer uses. Of course, buy-back will likely not be for full purchase price or as much as you can get using more time intensive methods.
Auction
Now we’re getting to the more lucrative disposition strategies. Auctions are a great way to capture quick returns on that excess inventory that you’re eager to say goodbye to. Typically auctions involve inventory being sold by the lot. The financial return on an auction can vary, as there is no set price for inventory to be sold at. In many cases, companies who don’t have a set dollar value in mind and simply want to remove the inventory to free up warehouse space choose this option.
Third-Party Liquidation
Once again, third party liquidation can provide quick returns and allow companies to remove excess inventory immediately. Often third party liquidation companies will purchase excess inventory at a percentage of the market value. Upon agreement, the third party provider will usually be responsible for gathering the inventory from your facilities, therefore eliminating any logistical burden on your company.
This is a good option if you’re concerned with getting rid of excess inventory quickly or don’t have the resources to deal with other options.
e-Commerce
Often seen as the last resort, e-commerce can be used to slowly sell off excess inventory online through various sites such as eBay, Amazon, and others. The e-commerce strategy requires much more management as each item will be posted individually and inquiries must be responded to on a daily basis. Once the sale has been made, you will also have to manage the logistics, including pulling the item out of your warehouse, putting it in the appropriate shipping package, and sending it to the buyer.
This method can result in the highest dollar return, but it can also be the most time consuming and resource intensive.
Ongoing inventory “right sizing”
The initial push to get your inventory in order can be a lot of work, so it’s worth your time and effort to make sure your inventory stays organized and properly stocked for your needs. As we discussed in our previous blog series, How Material Master Data Drives Efficiency, having usable Material Master data can completely change your processes for the better, optimizing procurement, maintenance, searchability, and your inventory as a whole.
IMA can help you start your data cleansing or governance journey to bring your organization to optimal efficiency. For more information, check out our information page or contact info@imaltd.com. We’d be happy to discuss your goals and needs today!
Conclusion
As you can see, there are many options for disposing of excess and unused inventory. Choosing the right solution is key and depends on your specific objectives. If you’re simply aiming to right-size your inventory you may want to first consider attrition or corporate internal redeployment. If you’re looking for quick removal and cash returns, then an auction or third-party liquidation solution might be your best bet. Regardless of which solution you choose, the important thing is that you have identified that you have excess inventory and you’re ready to do something about it.
For more information on inventory optimization and disposition strategies, visit www.imaltd.com or contact info@imaltd.com.
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