Contract manufacturers use a pricing method called cost plus (for a description of cost plus pricing, click here). This method...
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US manufacturers lose an estimated $450 billion annually to excess inventory. The best way to reduce inventory write downs is preventing excess in the first place. Here are three tips to help you avoid and deal with excess inventory.
TIP #1 Monitor Real-Time ERP Messages
Messages from your ERP are your most important tools. If your data is accurate and consistently monitored, executing these three materials messages is crucial to preventing excess:
- Push: A signal indicating the due date must be pushed out. All material orders should be pushed back to meet the revised need date.
- Cancel: Demand has evaporated and there is no foreseeable demand. All materials orders should immediately be canceled.
- Excess: Most ERP systems have excess reports built in; if not, you must create a custom report. Excess is created in two ways: 1) By procuring more than is required by ERP, and 2) By demand changing, making on-hand inventory become excess. In either case, knowing about the excess in near-real time maximizes your chances of executing a return to vendor.
TIP #2 Cultivate a Flexible Supply Chain
A flexible supply chain has become imperative in today’s business environment where demand can dramatically change overnight. Creating a relationship with your vendor that allows for willingness to reschedule, cancel, or return to vendor (RTV) should be a top priority. Most suppliers will react favorably when the communication is open and honest. A supplier that lacks trust or feels mistreated is not likely to do their very best when asked to reschedule, cancel, or return product. In larger relationships, negotiation of terms that allow for adequate and reasonable flexibility is paramount.
TIP #3 Managed Excess Inventory Solution
If all else fails, a managed excess inventory solution utilizing non-authorized distribution can allow you to minimize loss on your investment. For example, America II is an industry-recognized component distributer with proven marketing channels and one of the largest sales forces in the industry. They are capable of monitoring your inventory constantly and proactively identify and disposition excess. These kinds of distributers can often recover 50 percent or more of your inventory value.
If your systems fail, your suppliers won't take the inventory back, and you don't already have a plan for dispositioning excess, your final options are to write off the inventory or sell your excess to a broker. You can reasonably hope to get 10–20 percent on a diverse lot of components.
This post originally appeared on the DigiSource Blog