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How can Industrial OEMs deal with excess inventory?

The more things change, the more they remain the same.

Target, recently, announced price cuts to get rid of excess inventory while acknowledging that this would squeeze their profits. Our Global Customer Success Manager Tom Sturdivant wrote about excess inventory piling up 2 years ago when we were in the midst of the pandemic. We had never imagined that we would be reviving this blog after two years but here we are. While the cause for excess inventory back then was COVID-induced sudden lockdowns across the globe, this time around there are a myriad of factors driving inventory pile-up. The supply chain disruption that was triggered by the pandemic has exacerbated and factors such as lockdown in China, the Ukraine crisis, semiconductor shortage, etc have all contributed to Industrial OEMs feeling the heat. Of course, the situation is highly variable, even within an industry or a single company; companies are struggling to fulfill some orders due to a lack of inventory, while they might have excess in other parts, products, etc. While both problems currently exist (shortages and excess), this blog focuses on the excess inventory side of the coin.

And Industrial excess inventory is building rapidly

We frequently crunch industry numbers, and between our observations and trusted industry sources, the numbers look troublesome. The excess inventory for the month ending April 2022 as compared to 6 months earlier shows an increasing trend across most sectors.  While supply chain challenges are still very real for many manufacturers, most are, at the same time, also dealing with the increasing inventory at the same time – i.e., for some parts, it is a struggle to procure them and for others, there is too much stock on hand. Industrial Inventory % change over a 6-month period from Nov 2021 to  April 2022 chart
ref: US Census.gov data for the period of Nov 2021 to April 2022

Excess inventory is a problem on our best of days. The current market forces are making this worse.

There are several costs (carrying costs) involved in handling excess inventory. Prominent among them are – 
  1. Capital Costs
  2. Storage Costs
  3. Service Costs
  4. Other costs such as Shrinkage
  5. Expiration of goods
  6. Inventory Loss 
The last one is a bit complex because there have been instances where holding supply-side inventory over some time has resulted in a neat little profit due to an increase in the purchase price. When inventory costs are calculated at the original purchase price in accounting, it may reflect a positive because of the difference in current & past prices. We could extend that the same can happen on the sell-side when the finished product is held onto. Still, we highly doubt that either of these scenarios is a planned-out strategy & is more an outcome of circumstances such as the one we find ourselves in today. A big advantage of getting rid of excess inventory is that it helps save storage costs and free up cash to accumulate what’s needed. You probably already knew that, so we would not get into the specifics. But instead, let’s talk about what you can do when faced with excess inventory.

How to solve for excess inventory?

Here’s Tom’s original 5-step strategy refreshed for recessionary times :
  1. 80/20 Split –

    The good old 80/20 split works like a charm every time, based on our experience. Here, you would categorize inventory into the essential 20% that you need to hold on to based on future purchase price considerations, take into account several of the costs that we outlined above, based on criticality to running operations (or resuming operations post lockdown). The other 80% is the one that you’d like to offload sooner than later. In case the 80/20 split is too time-consuming for you, here’s a pro-tip:
      “Look for duplicates in aftermarket parts that were made, and while part A was sold to the customer, part B lies in your stockpile. Reach out to this customer and ask them if they’d like to stock-up”
  2. The Inevitable Price Battle –

    At some point in time, you would have to start considering taking excess inventory off your plate through discounted pricing. Two years ago, industry leader Leo Stevens advised against discounting too early in the game, and we couldn’t agree more. As the economy opens up, however, it is almost inevitable that a pricing war will ensue. Our only suggestion is to go in with a strategy – decide what price points & volumes you are willing to consider. Now, throw in the ‘nature of the business relationship’ with your customer. Some customers are likely bound to stick around longer with you. A discounted pricing will build goodwill that is unparalleled & go a long way in ensuring your customers will stick with you. Interestingly, this is also one of those times where you could find a potential buyer who considered your inventory beyond their purchase price point.
  3. Renegotiate your contracts –

    Everyone is in the same boat at the moment. If you were to renegotiate contracts with your vendors, they would understand. We’ve noticed a level of empathy & collaboration in the business space in the last two years, which gives us  hope that you would be able to work out revised volume, price & cadence with your vendors. And if they refuse to comply, maybe it’s time to rethink this relationship.
  4. Prepare to be renegotiated with –

    It’s the circle of life & just as you negotiate with your vendors, your customers, too, would approach you. The same principle applies here, as well. Empathy & understanding first, followed by pure business decisions. As we head into a recession, it’s a question of supporting each other so everyone can survive. Killing the business ecosystem through a survivalist attitude will do more damage than what the industry can handle right now.
  5. Think Donating the inventory –

    You may start facing diminishing returns strong enough to offload inventory quickly. A great place to start would be donating the inventory to a cause. We highly doubt a charity runs a manufacturing unit, but you could find that your customers (and non-customers, too) are donating to various causes. Supplementing their effort with your inventory would do wonders for the relationship, not to mention the benefit to society. Your marketing team & employees would love to share this with the world, positively impacting your corporate social responsibility and your image as a trustworthy brand.
We’d be happy to talk to you more about excess inventory & we have a couple of ideas on how you could implement deeper, machine learning-driven, battle-tested strategies. Contact us if you’d like to take us up on the offer.
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