W H I T E P A P E R Strategic Approaches to Alleviate Excess and Obsolete Inventory

Transcription

1 W H I T E P A P E R Strategic Approaches to Alleviate Excess and Obsolete Inventory By Harvey Ignacio, Supply Chain Manager Bob Gruber, Director, Inventory Business Group August America II Electronics, Inc. All rights reserved. Page 1

2 Excess and Obsolete Inventory: Identifying it Many original equipment manufacturers (OEMs) and electronic manufacture service (EMS) providers try to manage and maintain a supply chain with minimal excess and obsolete (E/O) inventory. Whether the OEM uses EMS providers for turnkey services or consigns the inventory with them, one or both parties end up dealing with its disposition. Typically, excess inventory comes in at least three general forms: board level components, subassemblies, or finished goods. Regardless of what form the excess comes in, it is important to ask why this excess exists and is there future demand for it. If not, what can be done with each form. Therefore, before engaging in the scenarios of some of the companies that have managed their E/O inventory through various solutions or programs, let s define the types of excess and obsolete inventory that may remain on your financial books. Excess inventory with demand This set of inventory typically has been forecast for usage within 6-12 months in the material requirement plan (MRP) system. Excess inventory with no demand This set of inventory typically has not had demand for 12 months or more in the MRP, and has not been designed out of the bill of materials, or is being reserved for service and repairs. Obsolete inventory This set of inventory, also known as dead stock, is no longer used in a specific bill of materials, either because the part was designed out, or the company s specific product line is being replaced with the next generation. Whichever type or types of E/O inventory you carry, our goal is to help OEM companies and EMS providers determine how to alleviate their E/O burden, and recover revenue (both practically and strategically) as it relates to their own financial situation America II Electronics, Inc. All rights reserved. Page 2

3 Strategic Aproaches to Alleviate E/O: Three Scenarios We hope the following scenarios in managing E/O inventory help you determine which solution or solutions best fit within your organizational operation and maximize your return on investment. Scenario 1 Financial Reserves Applied An OEM with headquarters in the western United States kits components and consigns them with their EMS provider for printed circuit board assembly. They review excess for disposition every six months. Due to Finance placing reserves on excess inventory with no demand and obsolete inventory to their own production, Purchasing and Operations decide to distribute the excess list to a few independent distributors and brokers for line and lot bids. Estimated value of the list is $215,000. After reviewing the bids, they liquidate the entire lot of inventory through an independent distributor for $20,700. Although revenue returns through this solution are minimal (5-10% of current market), the OEM is free from managing inventory that has been reserved, written off the books, and considered scrapped. Scenario 2 Financial Reserves Unapplied or Unavailable An OEM using a top-tier global EMS provider for turnkey production receives an E/O inventory claim every quarter. After the OEM materials management team reviews and agrees with the claim, they issue a PO for the E/O inventory for an estimated $675,000. Included in the claim is excess with demand, which is about $225,000 of the total. In this case, Finance is not ready to apply reserves and write-off the inventory from the financials. Management decides the best option is to consign the $450,000 worth of inventory classified as excess with no demand and obsolete with an independent distributor that provided a market analysis of the E/O inventory list. The consignment program allows the OEM to recover more revenue over time and allows Finance to minimize the amount of reserves to be applied at the end of the fiscal quarter or year. Consignments may recover anywhere between 50-70% of current market value. This program also allows for unsold line items to be returned if required for any unexpected demand, such as legacy builds or service/repair. In regards to the $225,000 of excess with demand, the OEM decides to keep possession of this inventory, but allows the independent distributor to market and list it to see if any potential sales can be made. This option allows the OEM control over the pricing with potential to recover as much as 100% of their cost. It also helps minimize the amount of financial reserves to be applied to the E/O inventory America II Electronics, Inc. All rights reserved. Page 3

4 Scenario 3 E/O Inventory Management Beyond the typical line, lot, and consignment solution, one OEM wanted and required more than the status quo. Imagine Scenarios 1 and 2 combined with E/O claim audit, asset management, and vendor managed inventory (VMI) programs. This OEM is working with more than one global EMS provider. In one situation, the OEM requested that the independent distributor they had a consignment program with ship in and inspect an entire E/O claim from their EMS provider. Upon receipt, the independent distributor discovered various discrepancies ranging from line item quantities (of board level components, sub-assemblies, and finished goods) to the condition and quality of product. After reporting back to the OEM, they reviewed the audit of the inventory, and they disputed the EMS provider s original E/O claim. This E/O audit saved the OEM over $350,000 in claims with the EMS provider. Furthermore, the OEM has established multiple consignment warehouses to facilitate asset management of items no longer on the financial books, as well as VMI items from end-of-life or last time buys to be sold directly to their EMS provider for production. This has included subassemblies, and from time to time, finished goods that were sold to the OEM s service and repair facilities from their designated consignment warehouse. The VMI program was a value-added service that involved a consignment warehouse, in which the OEM recovered between 70-85% of the standard cost when sold to their specified EMS provider. In addition, it also saved the OEM money since it removed the cost for the OEM to hold it within their stockroom. It also removed carrying cost the EMS provider would have charged for holding/managing the materials. Within the first two years of the multi-consignment warehouse program, the OEM recovered over $11 million through their partnership with their preferred independent consignment partner. $1,000, $1,000, $800, $600, $500, $400, $200, $0.00 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr HN $122, $84, $183, $255, HU $232, $440, $699, $898, HV $380, $917, $998, $707, YTD Total Revenues: $5,920, $0.00 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr HN $184, $166, $321, $130, HU $631, $370, $551, $190, HV $924, $684, $507, $467, I2 $42, $354, $198, YF $3, YTD Total Revenues: $5,731, America II Electronics, Inc. All rights reserved. Page 4

5 Strategize and Implement E/O Inventory Solutions with America II Electronics We understand that purchasing and materials management is closely tied with operations and finance. We will work with you and your team closely to help determine what solutions would best fit your needs or requirements. We offer standard revenue recovery solutions like: Line bids Lot bids Consignment However, based on the above scenarios, America II can provide you with much more: Flexible options Exceptional service and quality Beneficial revenue returns to your bottom line Our experience and leadership in revenue recovery for E/O inventory has been integral in the supply chain for many OEM and EMS providers in the electronics industry, both globally and locally. We hope and strive to build long-lasting partnerships with you and your team. Contact us today at for more information about our revenue recovery solutions for excess and obsolete inventory. America II Electronics, Inc th Ave N St. Petersburg, FL bgruber@americaii.com Phone: Fax: Visit our website at America II Electronics, Inc. All rights reserved. Page 5

6 About America II Electronics, Inc. Established in 1989, America II Electronics, Inc. is one of the world s largest independent semiconductor distributors. Headquartered in St. Petersburg, Florida and with offices in the UK, Germany, China, Japan, Singapore and Mexico, the company stocks active, passive and electromechanical components from more than 1,900 manufacturers, while providing value-added services and inventory solutions from its ISO 9001:2008 and ESD-certified 420,000 square foot North American distribution facilities. With nearly four billion components in stock and ready to ship, America II has one of the largest inventories in the industry. The information contained in this document represents the current view of America II Electronics on the issues discussed as of the date of publication. Because America II must respond to changing market conditions, this document should not be interpreted to be a commitment on the part of America II, and America II cannot guarantee the accuracy of any information presented after the date of publication. This White Paper is for informational purposes only. AMERICA II MAKES NO WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, AS TO THE INFORMATION IN THIS DOCUMENT. Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of America II Electronics America II Electronics, Inc. All rights reserved America II Electronics, Inc. All rights reserved. Page 6