Newsflash—Excess Active and Obsolete Inventory Is a Money Drain

Excess inventory, which ties up working capital and whose value is declining by the day, does not necessarily come from new product introductions only. Namely, nowadays the manufacture of most goods is largely carried out in the Far East, which comes with a nominal item price advantage, but also with many potential downsides (see The Gain and Pain of Global Retail Sourcing). In addition to the inevitable quality, communication, and cultural issues, manufacturing product in such lower cost, remote locations means a sizeable lead time increase, as the goods will need to be transported from the Far East back to the company's warehouse. This in turn means that a planner will have to forecast the demand before placing an order with a remote supplier far away. In the high-tech and electronics world today, it is a common industry fact that forecast accuracy is at about 80 percent. This means that often 20 percent of everything that is manufactured is deemed to be "at risk" immediately and may never sell. In other words, potentially 80 percent of a company's inventory is active product that is currently selling. The remaining 20 percent is either slow-moving or will never sell simply because of the inevitably inaccurate forecast. Also, excess inventory scenarios often exist within worldwide services and warranty repair organizations. This can mean one of two things: One can have excess spares inventory that another service organization within the company or the distributor channel needs, but hardly anyone has any way of knowing about it; or there is excess stock of the product throughout the company and one must go to the open market to dispose of it. Other sources of excess inventory come from safety stocks, inventory buildups for seasonal and promotional items, bigger order sizes due to volume-based discounts, consignment inventories, returned goods, and so on.

To rub salt into the wound, excess active inventory is arguably the most difficult life cycle category to get rid of. If it is still on the original equipment manufacturing (OEM) company's price list, it is often contractually price-protected, and creating channel conflict by selling off discounted inventory to competing wholesalers is categorically not an option. In addition to the price protection that precludes the use of any form of broker liquidation, potential channel conflict restricts wholesale and retail options. Companies may sometimes resort to ineffective, high-overhead marketing promotions to move this inventory, but more often than not, significant quantities remain in the warehouse until eventually the product is rendered obsolete. Then it is eventually liquidated for several pennies on the dollar. While such marketing programs as promotions and rebates may move some excess inventory, profitability analysis reflects not only the margin impact of discounting, but the significant overhead costs of program management to develop, launch, and manage each distinct program as well. Hidden are the costs of claims matching, invoice reconciliation, credit resolution, and write-offs. Creating hefty financial reserves against product obsolescence, writing off the inventory, and ultimately recovering only a small fraction of the original value is the inevitable result of most companies' inventory asset management processes. Their focus, naturally, is on new product introduction.

There must be a smarter, more cost-efficient way for a company to increase its inventory asset recovery dollars. And there is. FreeFlow, a provider of business services, offers a way for businesses to off-load their inventory in the form of an online auction portal.