6 Ways to Turn Excess Stock Into Positive Cash Flow and Cost Savings

December 14, 2015

 

It’s no secret that every manufacturing organization has excess MRO inventory sitting around taking up valuable warehouse space and cost. So how do you tackle this challenge and dispose of that unnecessary overstock? 

 

First things first, you’ll need to clearly identify which parts are indeed excess and are safe to remove from the facility. This can be done through a detailed analysis of purchase and usage data. Typically the items of interest would be those that have been purchased and/or issued at least once during the analysis period (12-24 months) but have an on-hand quantity that exceeds the maximum inventory stocking level specified.

 

Once you have determined exactly which items are in excess and safe to remove, there are several inventory disposition strategies to consider. Ultimately, the inventory disposition strategy that you choose to implement will be determined by:

 

a) Resources Allocation

 

b) Timeline for Disposition

 

c) Dollar Value Expectation

 

Based on these requirements, the following are a few of the disposition strategies that you may want to consider:

 

Attrition

While this strategy will not deliver cash returns, it will allow for excess inventory to be used down to an efficient stocking level, reducing carrying costs and freeing up warehouse space. Based on the analysis of purchase and usage data, average daily usage can be calculated. Using this number along with other inventory variables, you may estimate the time that it will take for excess inventory to be used down to an optimal stocking level. If the attrition timeline were estimated to exceed a certain amount of days or months, you may want to consider a different disposition strategy that can produce quicker results.

 

Corporate Internal Redeployment

Another strategy that does not necessarily deliver cash returns but will allow for excess inventory to be transferred and consumed within other sites of the corporation. In order to make this strategy successful, you must identify other sites within the corporation that the specified excess parts are used in. Based on usage activity and on-hand quantities at those sites, you must determine a timeline for usage. Does the other site have plans to purchase this part in the near future? Does it make sense to put another site in an overmax state if the parts will be consumed in a short period of time? There are many variables to consider with this strategy but if implemented properly, it can deliver great benefits to all sites involved.

 

Supplier Buy-Back

Supplier buy-backs are always a successful disposition strategy and can often become a great negotiating factor within a supplier tendering process. In many cases, suppliers may agree to purchase the excess items which fall into their product group(s) for cash or credit towards future purchases. For example, a Bearing & Power Transmission supplier may agree to purchase any excess bearings, belts, etc. that are new in the original unaltered box. So if you’re planning to tender out your MRO spend, this is a great strategy to keep in mind during negotiations.

 

Auction

Now we’re getting to the more lucrative disposition strategies. Auctions are a great way to capture quick returns on that excess inventory that you’re eager to say goodbye to. Typically auctions involve inventory being sold by the lot. The financial return on an auction can vary, as there is no set price for inventory to be sold at. In many cases, companies who don’t have a set dollar value in mind and simply want to remove the inventory to free up warehouse space choose this option.

 

Third-Party Liquidation

Once again, third party liquidation can provide quick returns and allow companies to remove excess inventory immediately. Often third party liquidation companies will purchase excess inventory at a percentage of the market value. Upon agreement, the third party provider will usually be responsible for gathering the inventory from your facilities, therefore eliminating any logistical burden on your company. 

 

e-Commerce

Often seen as the last resort, e-Commerce can be used to slowly sell off excess inventory online through various sites such as eBay, Amazon, and others. The e-Commerce strategy requires much more management as each item will be posted individually and inquiries must be responded to on a daily basis. Once the sale has been made, you will also have to manage the logistics, including pulling the item out of your warehouse, putting it in the appropriate shipping package, and sending it to the buyer. 

 

As you can see, there are many options for disposing of excess and unused inventory. Choosing the right solution is key and depends on your specific objectives. If you’re simply aiming to right-size your inventory you may want to first consider Attrition or Corporate Internal Redeployment. If you’re looking for quick removal and cash returns, then an auction or third-party liquidation solution might be a great your best bet. Regardless of which solution you choose, the important thing is that you have identified that you have excess inventory and you’re ready to do something about it. 


For more information on Inventory Optimization and Disposition Strategies, please visit www.imaltd.com or contact info@imaltd.com.

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