The Opportunity Costs of Excess Inventory

By Logan Wamsley

The common industry rule of thumb for excess inventory is that for every year it sits in warehousing, it can cost your company 25-30 percent of the inventory’s original value. Such costs include basic service and handling costs (handler wages, handling equipment, power and climate controls, etc.), as well as the costs of associated taxes that account for assets on-hand for the given year. But to understand the true toll excess inventory has on an OEM’s bottom line, it’s important to consider not just how much the inventory explicitly costs, but what the OEM is losing when choosing to keep it.

1. Warehousing

In the automotive industry, it was estimated by Forbes that when production of current product lines is delayed for any reason — most commonly in the delay of raw material or electronic component fulfillment — it costs the company approximately $4,000 per minute. This reality, combined with the unprecedented growth of the electronic components industry expected to be driven by automotive in the coming years (while studies have yet to be released, it is estimated that the electronic vehicle sales alone increased approximately 38 percent in 2018) necessitates that OEMs prioritize maximizing the limited storage space they have for products in production today. Every square foot of space dedicated to housing excess or obsolete inventory represents space that could be used to address more pressing, profitable needs.

2. Depreciating Value

While it is universally accepted that the vast majority of excess electronic inventory will devalue over time, it surprises many just how quickly the depreciation process occurs. Occasionally niche components originally designed for a select market will hold value, but generic electronics can easily lose up to 70 percent of their original value in less than a year depending on the state of the market. Factor in the time needed for an OEM to properly “market” their excess and obsolete inventory on the open market (if it’s marketed at all), it’s reasonable to expect an approximately 3-5 percent return on the component’s original value. Most estimates indicate that roughly 5 to 20 percent of all inventory accumulated will become excess or obsolete inventory before it has the chance to be properly used in a product’s assembly – and the longer it sits, the less ROI the OEM can expect when the time comes to sell it.

3. The Selling Process

Speaking of the selling process, let’s assume for a moment that the OEM in question is, in fact, willing to allocate a degree of its resources toward marketing its excess inventory in the hope of maximizing what ROI is still left to be had. The chances of an OEM dedicating a full-time department toward excess or obsolete inventory are slim to none, so this means that the marketing team needed for this venture will have to be pulled away from other priorities. Putting a figure on exactly how much sales of current products would suffer if such an initiative was added to this team’s day-to-day is difficult, but to implement a sound marketing strategy that avoids the risks associated with operating on the open market is a full-time proposition. Time must be taken to properly vet the resources used to expose the excess to potential buyers, properly detail the inventory through descriptions and photos, keep quantities up-to-date, and (should it become necessary) arrange a competitive lot bid. Even in the best scenarios, excess inventory returns very little chance of exceeding what a marketing team could accomplish dedicating all their time to what they should be doing – selling the products that contribute the bulk of the OEM’s revenue stream.

The Partstat Excess Inventory Solution

Selling your excess and obsolete inventory through Partstat gives customers all the benefits of a proven marketing strategy, without losing any opportunity costs associated with warehousing, marketing, or time. Before the selling process even begins, Partstat will provide all the costs necessary to ship the inventory to one of our climate-controlled storage facilities, where it will remain until a buyer is found. In fact, Partstat will not charge customers a dime for this feature; we only receive payment if the inventory is sold. This structure gives us the added incentive to sell our customer’s inventory in a timely fashion to maximize ROI before value depreciates too drastically.

And the best part? While the Partstat staff implements our marketing strategy to expose the inventory to thousands of potential buyers on Partstat, dozens of paid subscription sites, and on every major search engine including Google, our customers can dedicate themselves to maximizing their time and resources towards what provides them the most profit: their current product lines.

The Parstat Excess Inventory Solution is the only all-in-one offering on the market for selling excess and obsolete inventory – and as our customers GE, Philips, Emerson, and Harris can attest, it’s a solution well worth implementing.

For more details, click here.