The Supply Chain Resource Cooperative held its first ever “Executive Roundtable on Excess and Obsolete Inventory” on the NC State campus on October 25, 2017. The event was attended by 25 executives from a variety of different industries and backgrounds. Inventory Management Partners, LLC sponsored the event, and helped craft the format and content for the discussion. The objective of this session was to openly discuss some of the challenges that exist in managing this over-looked asset, and begin to shine a light on approaches that can be more effective in dealing with the issue.
After much discussion, the executive roundtable identified a number of characteristics associated with a properly developed excess and obsolete (E&O) inventory strategy:
Assign accountability. Executives need to deal with inventory issues as they arise! Organizations need to be proactive about making an E&O decision; and when E&O inventory does occur, immediately seek to address the issue. Can it be used somewhere else, or can companies assume it won't be used? If E&O inventory is not used, can companies absorb that cost into the business and recognize it?
Design products with the end of the supply chain in mind. Ensure that engineers are more aware of how parts left over at the end of the product life cycle will consume working capital, and train them on these costs. For example, Huawei had a component engineering team reporting into procurement, and they were responsible for dictating components that went into every line of business to ensure maximum flexibility for usage of parts. They forced component engineers to pull designs from existing baskets of parts, which addressed many of the problems with complexity and avoided unique parts.
Management awareness of E&O impacts. Is there a senior management team committed to driving down excess and obsolete inventory levels? E&O should be viewed as pure cash. For example, more and more companies are establishing incentives for sales people who now earn part of their bonus based on how accurately they forecast to the SKU level -- not to the planning level--which aggregates many parts; is relatively stable; and is easy to forecast.
Planning and sales communication. There needs to be important communication channels between planning and sales managers. The discussion could include a dialogue such as: “How real is your forecast? (I won’t expose you)”. Sales people tend to load their forecasts by as much as 10 percent, which drives the MRP orders. There needs to be a one-to-one relationship between sales and demand planning to ensure complete transparency and real-time communication.
Change sales incentives. It also helps if sales team bonuses are tied to inventory and tied to budget on S&OPs. Metrics on sales forecasts, not only on final shipping but on configuration and BOM accuracy, is an important element. Customer-named accounts and configurations can help to improve sales accuracy; drive accountability for how the inventory was generated to a specific customer order and sales person; and drive accountability six months down the road. Sales people will change their behaviors under these conditions.
Develop an E&O narrative. There needs to be a story constructed around how inventory is generated and accountability for the inventory to drive out the buffer-planning behavior that occurs. There needs to be reviews of min-max cycles, minimum liability planning on configured products, and intelligence narrowing of the product portfolio as a result. Product design standards and ownership is key.
Plan for E&O to be an outcome of mergers and acquisitions. Several executives noted that mergers of two companies, with different cultures and philosophies about product design, customer service, and the resulting inventory strategy that emerges, can often create a huge amount of E&O inventory. The cycle of business that drives these mergers causes a huge amount of instability in the network, and creates costs that often far outweigh potential savings. This creates a mismatch in systems and philosophies that take years to overcome and stabilize. Once they are finally overcome, the next merger comes along and the cycle starts again.
Focus on forecasting performance for mix, not final product. Forecasting performance analysis should be used to understand the strategy around what products/components will be consistently inaccurate. At one company, leaders challenged managers to understand the people ordering parts, and performed a deep analysis on what parts were driven into the supply chain through poor planning activities. Such an analysis can help to prevent such problems from recurring. A pilot project was done to look at service parts through tier 2 components; what was being purchased; what were the MOQs, and have suppliers share what they were seeing vs. what was being ordered. Open discussions with partners on lead times, inventory levels, and forecast accuracy is a good start.
Measure life cycle inventory cost. A planning process in the design stage can also help to build in the cost of inventory early on. A best practice at one company is to establish the life cycle cost for components during the design phase, and define the total life cycle cost of having ANYTHING in inventory over the life of the product. At least setting a planned number makes sense and can enable a category strategy around that target to be established.
Evaluate decision impacts related to E&O. There also needs to be some work around the cost of decisions and their impact on inventory. What is the cost of an engineering change and the resulting E&O cost? What is the cost of a new product and end-of-life inventory write-offs? Development cost of product should include tooling, supplier qualification, warehousing, and write-offs at end of life. Focusing on these costs can start the conversation on the cost of complexity.
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About the author:
Rob Handfield is the Bank of America University Distinguished Professor of Supply Chain Management at North Carolina State University, and Executive Director of the Supply Chain Resource Cooperative (http://scm.ncsu.edu). He also serves as Faculty Lead for the Manufacturing Analytics group within the International Institute of Analytics, and is on the Faculty for Operations Research Curriculum at NC State University. Prior to this role, Handfield served as Associate Professor and Research Associate with the Global Procurement and Supply Chain Benchmarking Initiative at Michigan State University from 1992-1999. He received his PhD in Management from the University of North Carolina at Chapel Hill.
Handfield is the author of several books on supply chain management, the most recent being Biopharmaceutical Supply Chains, Supply Market Intelligence, Supply Chain Re-Design and Introduction to Supply Chain Management (Prentice Hall, 1999, 25,000 copies sold, and translated into Chinese, Japanese, and Korean). He has co-authored textbooks for MBA and undergraduate classes including Purchasing and Supply Chain Management 6th revision (with Robert Monczka) and Operations and Supply Chain Management 3rd revision (with Cecil Bozarth). He recently led a global study on the Emerging Procurement Technology: Data Analytics and Cognitive Analytics for CAPS Research, Procurement Analytics for IBM, Global Logistics Trends and Strategies for BVL International in 2013, and a report entitled Future Buy: The Future of Procurement published by KPMG.
Handfield has consulted with over 25 Fortune 500 companies, and his work has been cited in over 24,000 publications according to Google Scholar.