Double the Punishment for Obsolete Inventory
You arrived at work this morning and were summoned to a meeting with your CEO and CFO. They are furious. You have over one million dollars tied up in inventory that hasn’t moved in six months and they want to know why.
“We need you to free up cash from our inventory so we can use it to fund new product development. What’s the problem?”
You take a deep breath and reveal the reality of the situation.
“We’re sitting on a large inventory of parts that were purchased to make products we don’t sell anymore. Our suppliers don’t offer returns so we’re trying to find a third-party part distributer that might want to sell these parts for us. If no-one wants them, we’re stuck and will have to write them off as a loss.”
As you sit back down in your chair, you wonder how you got yourself into this situation. You worked hard, you wrote great contracts and you negotiated excellent payment terms. You realize then, that there is a double punishment associated with obsolete inventory.
Punishment #1: You can’t access the cash tied up in obsolete inventory.
Punishment #2: You’re now going to spend a lot of time, resources and money trying to find someone who might want the inventory.
How to Avoid the Punishment
As you head back to your office you begin to think about how you got into this situation. A few possibilities come to mind.
First, you didn’t pay attention to product demand. Neither you nor your team was looking at the forecasts for each product. Every product has a life cycle and you keep ending up with excess inventory every time you come to the end of production for a product. No-one on your team is mathematical, so you’re paying the price for not obtaining forecasting expertise.
Next, because you’re “not into numbers,” you and your team failed to calculate the levels of inventory you should carry based on your desired service levels and demand volatility. You realize now that numbers do matter. You commit to researching forecasting methods and inventory level calculations or at least locating the expertise for these activities.
Finally, you realize that no-one was really keeping an eye on the accuracy of your inventory. You only cycle count once per year before year end so the numbers are accurate for the balance sheet. Throughout the year, you’re just not quite sure how accurate the inventory levels are inside your inventory management system. You commit to reading up on the ABC method of inventory.
With your new found commitments, you will be well-positioned to avoid this situation in the future… but in the meantime, what will you do with the one million in obsolete inventory?
Tracey Smith is an internationally recognized analytics consultant, speaker and author. Tracey has worked with and advised organizations, both well-known and little-known, on how to use data analytics to impact the bottom line. Her career spans the areas of engineering, supply chain and human resources. If you would like to learn more, please visit www.numericalinsights.com or contact Tracey Smith through LinkedIn. You can check out her books on her Amazon Author Page.