July 8, 2011
Inventory that refuses to move is a frustrating problem, but wishful thinking won’t make it go away. Waiting for your sales forecast to actually come true will not likely solve the problem, nor will waiting for the market to turn around. Meanwhile, you’re tying up cash, storage space, and maintenance resources.
Slow-moving inventory, like integrated circuits, is a common problem for most electronics start-ups and manufacturers. Even manufacturers that outsource their assemblies are often on the hook for components that suddenly become obsolete due to revision changes, minimum package quantities, or cancellations.
Sitting on the problem only makes matters worse. As date codes get older, your parts become less sellable, and revision changes could render them worthless in an instant. Regulatory factors, such as the upcoming European Union Reduction of Hazardous Substances (RoHS) Directive, compounds the problem as the industry gears up for mandated changes to components, such as lead free.
According to Michael Kirschner of Design Chain Associates, LLC, “Many OEMs are not prepared for the impact of the upcoming RoHS Directive and the impact it will have on their products and supply chains. Many components that are not RoHS compliant could be rendered of little value to them once replacement parts are available in the marketplace.”
Want more cash and less inventory? The best way to approach the problem is to know your options. Begin by drawing up a list of your components—a spreadsheet is convenient—sorted from most to least valuable. Most ERP, MRP, and inventory management programs have a “no-demand” report that’ll do this for you quickly. You’ll probably want to have the most expensive items reviewed by your warehouse staff, to check for integrity of the components. Once you’ve made your list, you’ll be ready to unload your inventory.
Here are five proven effective methods:
1) Return your parts to the supplier – Many suppliers will accept returns with some negotiation. Re-stocking fees can usually be discussed and further negotiated if you have existing open purchase orders and/or the promise of future business. Even with typical restocking fees of 10 to 30 percent, this will produce more cash than any other option.
2) Sell them through a consignment vendor – If you can’t return your parts, your next best return option is consignment through a reputable vendor. Our data indicates that a consignment sale can yield a 40 percent or higher return than selling all of your components as an entire lot for cash. Choose a consignment vendor who:
- Won’t charge to receive, inspect, and list your inventory.
- Has incentives to sell your inventory at the highest possible price.
- Will negotiate a fixed percentage limit of your standard cost that the consignment vendor can go to, if necessary. This can range between 15 percent to 80 percent of your standard cost.
- Is local to your facility. This saves on shipping costs and allows you to retrieve un-sold components if and when your requirements change
- Can furnish detailed monthly reports of your inventory in their stock, listed by your internal part number. This way you can keep them on your books.
- Is willing to furnish detailed reports of your sold inventory.
- You can trust. They should allow you to audit a certain number of transactions in any given month. This helps ensure accuracy and honesty.
- Understands the proper handling for components that are sensitive to ESD and moisture.
- Has a global marketing plan, to maximize sales opportunities.
- Will work with you on your write-offs, so you don’t have to take a too big a financial hit in any given month or quarter.
You should expect to recoup 50-70 percent of the sales price when selling through a consignment vendor, depending on condition, keeping in mind that the market price of your components may be significantly lower than your standard cost or purchase price.
3) Sell the components yourself – This is advisable if you have either very few parts, or the extra staff to inventory the components, list all the details, and market the inventory worldwide. Expect multiple inquires involving date codes, lot codes, packaging of various quantities, and returns. Your accounting department will need to set up new accounts quickly as 80 percent of buyers expect same-day shipment. If you have a few high-dollar components, you might want to try listing them on eBay. Do your homework and find out what the market price is before you list.
4) Selling for immediate cash – This is advantageous if you can afford to accept a low price and take the write-down all at once. Some of our customers need to dispose of all obsolete inventories at once. You can expect to receive bids of 1 to 5 percent of the standard cost of the inventory. To maximize your bid:
- List your components in a spreadsheet, preferably with manufacturer part numbers and date codes. Include a cost for each line item.
- Allow for inspection of the packaging and condition to maximize the bids.
- Segregate custom components that you might want to dispose of from industry standard components. Some vendors will dispose of these assets for you and provide a certificate of destruction.
5) Sell or transfer the inventory to other divisions of your company – Of course, this method doesn’t apply if you are not a multi-division company.
Regardless of which method you use, taking immediate action is key. Your inventory very well may have a significant cash value today, but the longer you wait, the less you’re likely to get.
- Five Ways to Turn Your Electronics Inventory Into Cash
- Moisture Sensitive Components: Are You Handling Them Correctly?