Is Excess & Obsolete Inventory impacting Supply Chain Performance?

 

Excess and obsolete inventory is costing the typical business 15 - 25% a year of its original value.  This is a burden that most businesses cannot afford, especially today.  However, since the excess inventory is usually stored in the back of the warehouse, in high racks, or worst case, in an outside rented warehouse, most companies do not address the problem on a regular basis.

 

A colleague of mine, Jim Bissonette, had responsibility at Motorola for E&O and cost reductions for several years.  Here is what Jim had to say based on his analysis of the issues at Motorola:  “the problem that I was managing in the electronics industry was caused by our system not being able to react quickly enough to changes in demand with short product life cycles.  In the electronics industry, you are always coming out with new models and new technologies.  When you add the component lead times which can be up to 26 weeks, you have a very difficult situation to manage.”

 

My experience in dealing with the issue in both heavy equipment and consumer products manufacturing mirrors what Jim said.  I see three fundamental drivers of E&O:

 

• Customers do not buy as much as they forecast or order.
• Sales introduces new items that do not sell to forecast.
• Purchasing buys in large lots to take advantage of quantity price breaks.

 

Note that all of these are based on good intentions, and may be critical to your business.  Measurement of these situations is what is usually lacking –i.e. what does history tell you about the first two, and what is the trade-off in inventory represented in the third?

 

Motorola is a large company that can afford to assign the management of E&O inventory to one individual.  When we took a similar approach at Helene Curtis in the 90’s, we saw immediate improvement in the disposition of existing excess and obsolete and, importantly, we took steps toward prevention of more excess inventory in the future.

 

Jim ended our discussion with this suggestion:  “Organizations need to dedicate resources that can take ownership of E&O and not just report the problem or the data.  There is a huge opportunity for companies to reduce and mange E&O if only they would dedicate the resources.  Let’s face it, E&O does hit the bottom line.  Organizations today are scrambling for sales, cost reduction, and improved margins.  Why not attack and manage E&O.”