Think of your stored material as dollars stacked on shelves. By avoiding excess inventory, you can free up these dollars for productive, revenue generating purposes.

by Asbury R. Lockett, CPIM

Not only is this inventory taking up increasingly scarce warehouse space, but by the time an item is identified as obsolete, the options for its cost-effective disposition are severely limited. If suppliers agree to allow the return of an unneeded part, significant restocking fees can apply. Most restocking fees are in the 20 percent range, but restocking fees of 50 percent are not unheard of. (At some point, the restocking fee is probably best referred to as an "I don't want it either" fee.) Substituting a several-year-old part on a current product may be all but impossible. The condition of an unused part may have deteriorated over time rendering the part unusable (i.e., severe rust of metal parts or ESD damage to integrated circuits). Selling parts to liquidators or auctioning off obsolete inventory can yield pennies on the dollar. The final option is to take a complete loss by scrapping the part.

It is generally agreed that identifying a potentially obsolete part early in the process is far more preferable to identifying the part later. By doing so, the options for its disposition are the most favorable. Suppliers are much more amenable to accepting the return of a recently purchased part as opposed to one which is several years old. Even for custom-fabricated parts there may be a product that is similar enough for a part to be substituted. The possibility that an excess part can be used as a spare also increases with recently purchased parts. Even if the part must be scrapped, it is best to scrap a part today than allow it to consume such valuable commodities as warehouse space to store, computer space to track its location, handling time to relocate, and counting time during physical inventories and/or cycle counts. It is best to determine that a mistake was made, identify the root cause of the mistake, and avoid making the same mistake in the future.

Depending on the level of inventory, some companies elect to perform periodic surplus material reviews where material is identified as potentially surplus and disposition is attempted. The problem with this approach is that it often occurs so far after the material is acquired, the link between why the material was ordered but never used often cannot be made. Additionally, this review often occurs while the other job responsibilities of the person doing the investigation continues without interruption. Therefore, the thoroughness of the review, out of necessity, can be compromised. It is usually easier to do nothing than to go through the steps and paperwork necessary to disposition the material to a location other than where it currently sits.

The "material inertia" effect also comes into play. Analogous to the famous law of physics that a body at rest will tend to stay at rest &emdash; the tendency for material at rest to stay at rest is also very strong. There is often an optimistic view that the unused inventory will eventually be used and that its really not hurting anything to let it sit on a shelf for a little longer "just in case."

Instead of posing the question: What causes obsolete inventory?, let's start with the simpler corollary question: What doesn't cause obsolete inventory? Your planners, buyers, expediters, or whoever else may cause material to be brought into your facility do not bring it in just to improve the national economy. There is always a reason (even if this reason may sometimes be purely human error). Therefore, something happens between the time the material is ordered and the time it is formally declared obsolete. Somewhere along this timeline, the part is no longer needed.

Is there anywhere along this timeline where we can easily review the inventory to ensure that at this point the material is still needed? And even more importantly, would this review stand a good chance of identifying potentially obsolete material before the options for its disposal become extremely limited? The answer is a resounding "yes!" And the place is at your receiving dock.


Why receiving?
Depending on the degree of customization and material lead times, the requirements for a particular part may go away between the time an order is placed and the time it is received; or the actual usage may be falling short of the forecasted usage, but the ordering schedule remains as if the original forecast was correct. In either case, an ideal time to review the need for a particular part is at the time of receipt. Receiving only verifies that the part was ordered, not that it is actually needed. Like an enemy that has penetrated your first line of defense, an unneeded part that has found its way into your factory can hide in the nooks and crannies of your warehouse and become seemingly impossible to eliminate.

The review of incoming parts at receipt will need to be as automated as possible. A manual review requires someone having "free" time &emdash; a situation that is just too rare to rely upon. Depending on your inventory policies, you may want to look at certain unique or low-usage parts. A computerized check of these parts received as compared to requirements can be performed. If there is a net excess (total on hand after receipt exceeds requirements), then an exception report should be generated for review.

The goal is to make this a short list that can be analyzed. If the list is too long, maybe a certain dollar cutoff level can be set below which you will not review. The benefit of a short list is that it allows for a more thorough review and root cause identification for each part, answering such questions as:

• Did an order go away?
• Was the forecast wrong?
• Was there a model change?
• Is there a record error?
• Was it simply a planning error?

Regardless of the reason, the intent should be to get the part out of the plant if it is not going to be used. If it is to be used, then you should track it to ensure that it really does get consumed. Check the inventory of this part periodically to verify that the planned usage actually does occur.


Deciding on what to review
Items likely to become obsolete will vary greatly among industries. For example, electronic devices may be subject to rapid change for an electronics manufacturer, while the housing these components fit into may be relatively stable. On the other hand, a manufacturer of heavy machinery may also use electronic devices, but these devices seldom change. However, in this industry, the fabricated parts may quickly change due to customer requirements.

Even among companies in the same industry, the list of likely obsolete parts may vary depending on the particular strategy employed by a company. Maybe one company's strength is its unusual reliability, while another company prides itself on being state-of-the-art technically. These two companies may have very differing, and equally valid, perspectives on which types of inventory are more subject to obsolescence.

The object is to review those items most likely to be unused if brought in when there are insufficient requirements. These parts must be easily separable from other parts via existing inventory coding. This point cannot be overemphasized. The last thing you want to do is reclassify all of your parts in order to accomplish this review. For instance, in an ABC inventory coding system, you may want to initially limit the review to "A" items.

If you have the luxury of being able to segregate your parts based on more coding options than A, B or C items, you may want to consider these additional factors when developing a list of parts whose net excess will be reviewed at receipt:

• Inventory used on products with decreasing demand
• Inventory subject to supplier improvements
• Inventory with limited shelf lives
• Unique parts used only by particular customers
• Parts easily damaged by frequent handling
• Parts with limited after-market value
• Parts being purchased based on forecasts and not firm orders

There may also be other criteria which would be applicable for your particular industry or company. As the defined categories get under control, "lower the bar" by examining other potential part categories that may yield obsolete material. By whittling away at potential obsolete incoming inventory, the root cause of any remaining obsolete material should be much easier to identify. With this type of review, it will be known that when the part was received there was a real demand for that part. Obsolescence occurred sometime after its arrival in-house.

This is one of those uncommon improvements where the benefits can be easily and directly quantified. Keep a scorecard of just how many dollars of inventory were identified at the time of receipt then dispositioned. At the end of the year, you should be able to document the dollar amount of excess inventory avoided. Over time, the periodic obsolete reviews should also become a non-event, since there will be far fewer parts falling into the review category.

The advantages of taking the proactive approach detailed here will have a multiplier effect in terms of its benefits rippling throughout various departments in the company. Not only do the material control and material handling functions benefit, but when coupled with a good program to identify root causes, even sales and design will come to understand the inventory impact of the decisions they make.

Copyright © 2020 by APICS — The Educational Society for Resource Management. All rights reserved.

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