How Industrial OEMs can deal with excess inventory?

Blogs | Jun 2020

excess inventory in warehouse while trucks sit idle

“Hey Tom, do you have any campaign ideas on excess inventory? With the slowdown all around, I thought it might be a good idea to check with you, given the year-long inventory campaigns you run for a customer of yours. Think you could help?” 

This was the note that I received one exceptionally bright morning couple of weeks from a customer of ours. My response to them was – “I thought you’d never ask…”. I run Customer Success at Entytle, working with top name brands across sectors every single day. I had spoken to this particular customer about how another customer, an industry leader in its segment, was always on top of the inventory game with sustained campaigns every quarter.

But beyond this rather lively exchange, lies a much more severe problem industrial OEMs are facing at the moment. I continue to work closely with several of our customers who have a sharp focus on excess inventory at all times. They have an impeccable record of ensuring inventory on the supply side and finished product does not exceed their defined thresholds. But, I am also painfully aware that in the general industry the best-laid plans have been…well, laid to rest in the current pandemic.

Excess inventory is stockpiling

We frequently crunch industry numbers, and between our observations as well as trusted industry sources, the numbers look troublesome. The excess inventory for the month ending April 2020 shows an increasing trend across most sectors. 

ref: US Census.gov data for the period of Jan 2020 to April 2020

Excess inventory is a problem on our best of days.

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. I could extend that the same can happen on the sell-side when the finished product is held onto. Still, I 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 I 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 my 5 step strategy that you can use today to deal with excess inventory as we head out of lockdowns and become almost normal again.

  1. 80/20 Split – The good old 80/20 split works like a charm every time based on my 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 I 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”

  1. The Inevitable Price Battle – At some point in time, you would have to start considering taking excess inventory off your plate through discounted pricing. A while 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 would ensue. My 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.
  2. Renegotiate your contracts – Everyone is in the same boat at the moment. If you were to renegotiate contracts with your vendors, trust me, they would understand. I’ve noticed a level of empathy & collaboration in the business space that I had never seen before, which gives me hope that you would be able to work out revised volume, price & cadence with your vendors. And in case they refuse to comply, maybe it’s time to rethink this relationship.
  3. 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 slowdown, 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.
  4. 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. I 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 responsible brand.

We’d be happy to talk to you more about excess inventory & I am sure I’d 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 me up on the offer.

 

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