Jan 21, 2002
The electronics industry has just come out of the worst allocation of the decade that lasted almost two years. This (controlled) allocation ended so fast it has many wondering just how much was hype and how much was just a planned margin increase by manufacturers. Many companies in an attempt to get parts, doubled and triple ordered, have now canceled those orders.
On top of the business trouble associated with being unable to complete projects due to unavailable parts, the business overall, has fallen flat. Large corporations have laid off hundreds of thousands of workers in attempts to streamline operations. Non-essential projects are being canceled. Investors are being told that revenues will be down, and some say the bottom has not been hit yet.
So you are not alone.
SURPLUS
Surplus is a universal problem, whether you are the CEO, CFO, COO, or a Product Manager, Sales Manager or Plant Manager, you know about the problems caused by surplus. Don�t feel alone, the estimates for surplus top $350 billion annually for the United States.
The problem is not going away, despite efforts by the business community to improve supply chain efficiency; inventory growth has outpaced sales growth.
It is reasonable to assume that a good chunk of that inventory consist of excess items. A recent survey of inventory managers conducted by the Institute of Management and Administration found that �removing excess, obsolete or slow moving inventory� has become there #1 most challenging task-by a 2:1 margin over the next most common response.
Some common factors contributing to inventory surplus are:
� Forecasting inaccuracy
� New product introductions
� Shift in buyer preferences
� Competitive activity
� Cancelled orders
Business surplus is more than just an annoyance. Too much surplus can cause a significant drag on your company�s financial performance. It can reduce your earnings and eventually depress your company�s stock price.
Some costs associated with surplus:
� Sunk cost/opportunity cost. Surplus assets represent hard dollars that your company has invested. Too often a manager will dwell on the amount he or she has invested in an asset, and that becomes a barrier to selling it. However in its surplus state, that asset has zero value to the company. Upon conversion of that asset to cash, the funds can be invested in productive equipment, parts, used to pay down a debt or put in the bank to generate interest.
� Poor space utilization. Whether its 500 discontinued computer monitors or a couple of skids of parts, surplus items take up space that could other wise be used for productive, revenue generating activities. Physical space cost money, and clogging it down with an unproductive asset does not help the productive part of your business.
� Depreciated expense. Many assets depreciate in value just sitting in a warehouse; this is especially true in the fast paced world of electronics. The longer you hold on to your surplus assets, the greater the chance the asset will become completely obsolete. You loose much of the value while you hold onto them.
� Tracking expense. Companies use systems and people to keep track of surplus items. These activities add cost to a company�s budget. The resources used for tracking could be better deployed in more productive activities.
� Insurance cost. Surplus inventory is also insured against damage or destruction.
� Higher taxes. Surplus assets get counted as part of total assets, and in many areas can increase the company�s property tax base.
EXAMPLE
ABC company has 40,000 telephones, stacked on 200 pallets, sitting in its warehouse. It has been unable to sell them to any of its regular customers. ABC�s cost to manufacture the phones is $15.00, for a total cost of $600,000.00. Assume that they could generate a 12% return on there money. Every month that ABC holds on to the inventory it incurs the following costs.
Warehousing ($1/month per pallet) $200.00
Inventory tracking (allocated monthly cost) $500.00
Insurance ($0.50/month per $1000.00) $300.00
Financial opportunity cost ($600,000x12% return/12 months) $6,000.00
Total monthly cost $7,000.00
Too much surplus can also adversely impact your company�s Return On Assets (ROA). ROA is a key financial measure that is widely accepted in the business community as a measure of a company�s performance. It is calculated as follows: ROA= Net Income/Assets. The lower the amount of assets, the higher the ROA. The goal of most companies is to maximize net income while minimizing the level of assets.
Senior managers today can be evaluated on ROA performance, and a large portion of their compensation can be tied to it. If that does not impact you directly there is a good chance that it matters to your boss or his. And this means that he or she is likely to be very interested in what you are doing to improve ROA. In addition, if your company is publicly traded you can bet that investors are monitoring you ROA closely. That means it can impact your stock price.
To Summarize
If your company wants to improve ROA then excess inventory is the first place to start.
SURPLUS STOCK DISPOSAL
THE PROS AND CONS.
THE NEED
To dispose of excess or surplus components
THE OPTIONS
Offer individual parts, job lot sale, consignment or throw it away
THE INDIVIDUAL PART SALE
You offer your excess to the highest bidder from companies in the surplus disposal market. These bids will usually be for partial quantities. This will be time consuming and will still leave you with slow-moving stock.
THE JOB LOT SALE
You offer as a complete job lot to the same companies so you solve the problem all at once. This method does limit the number of companies because many will only buy items they can turn over immediately.
THE CONSIGNMENT OPTION
This is the method most companies prefer due to higher returns.
THE FINANCIAL RETURN
Individual part sale may get full return of cost if that part is in a shortage situation but typically less than 50% return and partial quantities.
Job lot sale will typically yield 5 to 15% depending on product mix.
Consignment option will typically bring 40 to 60% again depending on product mix.
THE ADVANTAGES-CONSIGNMENT STOCK
Your product will be stored, insured, and marketed to a global database as the stock of one of Canada�s foremost independent distributors. With our vast experience and commission-based sales we ensure top market prices.
CONSIGNMENT DISPOSAL
YOUR QUESTIONS ANSWERED
WHAT IS CONSIGNMENT STOCK DISPOSAL?
This method is the one preferred by the money people, the highest return on investment with the least amount worry. This is an alternative to job lot sales or selling individual parts.
Consignment stock will typically give you a return of 40%+ depending on product mix. We suspect you wouldn�t have seen more than 10% from job lot sales.
There are advantages to consignment stock, like time (yours that is). We store, check, list and report your excess stock to our database of thousands.
We report to you on a monthly basis on all transactions. This can include all sales details including copies of invoices to our clients. We will send our bill to your accounting department listing the sales and our management fees.
Security is a major concern for many major OEM�s and we can keep your stock completely separate. All transactions are completely confidential.
Offer
To further assist you in bringing your costs in line, as an introductory offer I will give you a $500.00 credit toward purchases from other OEM�s stock on consignment or my own $22,000,00.00 inventory.
Credit. MUST be under 10% of invoice total, and can be used on multiple invoices.
Call now to arrange to solve your situation before it becomes a problem.
905-475-0671 Phone 905-475-3251 Fax
COBWEB ELECTRONIC PARTS LTD.
560 DENISON ST. UNIT#2
MARKHAM, ONTARIO
CANADA L3R 2M8
cobweb@idirect.com
