June 28, 2010

Recognizing inventory risk in technology manufacturing

Carrying too much inventory is a risky situation, yet it’s a common occurrence for many computer manufacturers, EMS providers and service depots. Excess product is easily accumulated during the ebb and flow of the forward and reverse supply chains, and problems arise when overvalued, obsolete or expired products are no longer needed and become a fiscal liability. In the typical overstock scenario, excess inventories are typically liquidated for pennies on the dollar.

Sources of Excess Inventory
Surplus inventory tends to pile up from several sources:

  • Inaccurate forecasting
  • Service spares excess
  • Customer returns
  • Order cancellations
  • Out-of-warranty or scrap product
  • Product recalls

How It Happens
There are many reasons why inventory becomes a liability, but some of the more prevalent ones are purely driven by demand for excellent customer satisfaction – the product must be manufactured on time, shipped on time and serviced on time. This means having the right parts on hand at all times. What is typically lost in translation here is the fact that although supply on hand ensures total customer satisfaction, it also has the tendency to result in excess inventory accumulation. This is due in part to canceled orders, poor planning and forecasting, a lack of dedicated internal resources to monitor pockets of supply and, ultimately, overbuying.

In addition, customer returns or materials returned from field service are not screened, tested and recertified to ODM specifications for reuse in the service supply chain. This leads to an increase in spend on new service spares that companies may already have in their possession but are not leveraging.

Valuing Excess Inventory
Once excess inventory is properly assessed, it can be grouped into three types of material: leading-edge technology, common technology and trailing-edge technology. Prices in all groups are directly affected by market conditions, and as they change, technology values change as well.

Forward-thinking organizations can minimize inventory risk by implementing asset reallocation processes that maintain, test and authenticate excess product in order to take full advantage of market spikes or to increase efficiencies in the service spares environment. A limited number of supply chain specialists such as Converge exist to manage the risk caused by excess inventory. These supply chain partners have experience in both the forward and reverse supply chains and offer validated excess inventory management programs that can reduce inventory risk and optimize the supply chain for computer manufacturers and OEMs.

For more information on this topic, I invite you to download our white paper, Excess Inventory Management.

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