What Are Companies Doing with Their Excess Parts?

The best way to manage excess inventory is not to have it. S&OP will help.

Even when planning, procurement, and inventory control are on the same page when it comes to sourcing and stocking electronic components, it is inevitable that there will be excess inventory. From a commercial standpoint, some of the excess may be the result of an overzealous buyer trying to get to that next quantity driven price break, a seller enforcing a minimum order value, or industry driven packing standards forcing the buyer to by specific quantities. 

Excess parts, whether due to overestimation of demand, design changes, loss of a customer order or technological obsolescence, can strain resources, tie up capital, and restrict operational efficiency and customer service. Let’s look deeper into the reasons behind the accumulation of excess parts, explore potential avenues for addressing surplus inventory, and analyze the inventory and financial ramifications associated with managing surplus inventory. 

Understanding the Causes of Excess Components

There are several factors that contribute to the accumulation of excess electronic components.

Forecasting Errors. Inaccurate demand forecasts can lead to overestimation of component requirements, resulting in high inventory levels. Even slight errors across a broad range of components can result in a large aggregate of excess inventory. A few at a time, it adds up quickly.

Design Changes. Engineering changes, revisions, or upgrades in product designs may render previously purchased components obsolete, leading to surplus inventory. Some engineering change orders will use up existing inventory until a cutover, but many don’t, considering the excess inventory as a cost they are willing to incur. 

Minimum Orders and Lot Sizes. Buyers are often restricted to minimum order quantities, minimum order values or products packaged in certain quantities due to packaging or handling restrictions. 

Technological Obsolescence. Rapid advancements in technology can render certain components obsolete, leading to excess inventory of outdated parts.

Managing Excess Components

Companies have several options for managing surplus inventory.

Sell It. Selling excess inventory back to the distributor or manufacturer where it was purchased is often the first option. Unopened packaging may be taken back but it may incur a restocking charge. Selling excess parts through various channels such as online marketplaces, auction sites, or direct sales to other businesses can help recoup some of the investment tied up in surplus inventory. Some companies even have community ‘yard sales’ to sell excess inventory that may be valuable to hobbyists or DIYers. 

Scrap It. Scrapping excess parts involves disposing of surplus inventory that has no market value or use. While this option helps eliminate excess inventory quickly, it may result in financial losses and environmental concerns associated with waste disposal. 

Donate It. Donating excess parts to charitable organizations, educational institutions, or community programs can be a socially responsible option for disposing of surplus inventory. While this option may not generate revenue directly, it can yield tax benefits and contribute to corporate social responsibility initiatives. Managing donation processes, documentation, and compliance requirements can be administratively burdensome. 

Assessing Inventory and Financial Ramifications

The management of excess parts has significant implications for both inventory management and financial performance. 

Inventory Holding Costs. Excess parts tie up valuable warehouse space and incur holding costs such as storage, insurance, and handling expenses. The longer surplus inventory remains idle, the higher the carrying costs associated with it.

Risk of Obsolescence. Surplus inventory runs the risk of becoming obsolete over time, especially in the fast-paced electronics industry. Obsolete parts not only lose market value but also incur additional costs for disposal or write-offs.

Impact on Working Capital.  Excess inventory ties up working capital, limiting the availability of funds for essential business activities such as payroll, supplier payments, and investments in growth opportunities. This can strain liquidity and hinder financial flexibility.

Address the Root Cause of Excess Inventory Through S&OP

The intent of sales and operations planning (S&OP) is to effectively balance supply and demand. S&OP is the interface between a company’s strategic business plan and its day-to-day operations. It’s a management level process for coordinating a company’s output of products and services, typically over a time horizon of 6 to 12 months. In the S&OP process, internal business units work cross-functionally in a synchronized effort to forecast anticipated demand, inventory, supply and customer lead times based on the sales forecast, actual demand, and the capacity of the company to meet customer requirements.  

Improved Demand Forecasting. S&OP involves analyzing historical sales data, market trends, and customer insights to forecast future demand more accurately. By having a clearer understanding of demand patterns, companies can adjust production levels accordingly, minimizing the risk of overproducing and accumulating excess inventory.

Alignment of Sales and Production Plans. S&OP brings together cross-functional teams from sales, marketing, operations, finance, procurement and other departments to collaborate on developing integrated sales and production plans. This alignment ensures that production levels are aligned with actual sales forecasts, preventing the accumulation of excess inventory at all levels due to mismatched supply and demand.

Inventory Optimization. Through S&OP, companies can identify opportunities to optimize inventory levels by balancing customer service levels with inventory carrying costs. By setting appropriate inventory targets and safety stock levels based on demand forecasts and production capacity, companies can minimize the risk of excess inventory while ensuring adequate stock to meet customer demand.

Early Warning System. S&OP provides a framework for regular reviews of sales and production plans. By monitoring key performance indicators (KPIs) such as inventory turnover, days of inventory on hand, and order fulfillment rates, companies can identify and address excess inventory issues before they become significant problems.

Scenario Planning and Decision Support. S&OP enables companies to conduct scenario planning to evaluate the impact of different demand situations, supply chain disruptions, or production constraints on inventory levels. By simulating various conditions and assessing their implications on inventory levels and financial performance, companies can make more informed decisions to manage appropriate inventory levels. 

Excess and obsolete parts pose significant challenges for companies, impacting inventory management, finance, customer service and operations. While companies may never be able to eliminate all excess inventory, sales and operations planning may help to better manage it.