In our posting "Is Your Company a SLOB – Part 1," we reviewed the subject of excess and obsolete (E&O) inventory, its causes and challenges. In this posting we review what can be done to address theproblem. The good news, there are viable options available to address E&O inventory. Here are a few:
- The inventory can be written off and scrapped. This will bring the inventory down the fastest but the loss comes right off of the bottom line for the quarter. This is usually NOT something the Finance folks like to do.
- The product can be sold off at bargain basement prices. While this is not as distasteful to the Finance and General Management as the first choice, this option does erode margin and hence profits. Also, selling product at very low prices could cannibalize full margin sales. To avoid this, companies will only offer these kinds of deals to liquidators, dollar stores, or export concerns. These customers are not the mainstream customers and there are many examples where these customers could resell these products to ones primary customers and again… eroding sales, margins, and profits.
- The product could be re-worked or sorted. This is good if the product is of high value to absorb the additional labor. But for many fast moving consumer goods, the margins and sales value of the product are such that it is less costly to simply produce new products from raw and pack material stocks.
- E&O includes WIP, raw materials, and packing materials. If the WIP and materials are generic or have other uses, they can be consumed or sold off. If they are unique to specific E&O finished goods, there is another problem that must be addressed. Do you scrap the material or build out as many finished goods as possible? This is never an easy debate. Consciously producing more E&O finished goods makes no sense. But neither does scrapping materials which could be converted and sold. Often, only the President or COO can resolve the debate by simply breaking the tie and making a mandate.
- Many companies are effective at reducing E&O when a task team consisting of Sales, Finance, and Supply Chain
In the managing of E&O, we see the true need for senior leadership to properly manage inventory. The President or COO must want sound and optimized inventory management, demonstrate clear leadership, and have the proper structure, incentives, and reviews in place to achieve the objectives. While the Supply Chain is often tasked with leading the effort and this may be a necessary condition, it is usually not sufficient. Marketing, Sales, Finance, and Manufacturing (if it is not included in the Supply Chain) must all be involved.
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Function
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Natural Inclination
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What should be done
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Marketing
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Never look backwards at the Demand Planning errors of the past that result in E&O.
Reluctant to sell E&O at less margin and hurt their business.
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Need to have some ownership of E&O & the reduction thereof.
E&O costs should impact their category P&L.
There will then be a focus on how to use the product in promotions, rework the product, and improve New Product Demand Planning.
Optimize the number of SKUs
Implement a product portfolio management. |
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Sales
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Never look backwards at the Demand Planning errors of the past that result in E&O.
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Need to assign sales people, as needed, to liquidate the E&O that is saleable.
Improve demand planning
Reduce sales variation.
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Finance
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Want less inventory
Reluctant to sell E&O for less margin
Even more reluctant to incur losses for scrapping product
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Should be a natural partner in managing inventory
Needs to arbitrate inventory vs absorption with the CFO & President
Implement a product portfolio management
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Manufacturing
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Want longer production runs with less changeovers
Wants higher absorption/utilization
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Stop running for hours when the product is not needed
Move to lean manufacturing as much as possible.
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Supply Chain
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Liquidate everything
Scrap what cannot be liquidated
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Create a showroom of E&O for the sales force Improve Demand Planning |
Lastly, while almost everyone calls these classes of inventory as Excess & Obsolete. There is at least one company that uses Slow & Obsolete (SLOB). The acronym SLOB has a very nice ring to it. Who wants to be a SLOB? Who wants to work for a SLOBby organization?
DemandCaster via our DemandCaster Demand Management tool has the capability to identify slow moving and obsolete inventory.
