A company’s profitability is often critically linked to the performance of its supply chain.
As more and more original equipment manufacturers (OEMs) move towards lean concepts, the higher the financial risk the OEM is exposed to should there be some sort of disruption. This is often passed further up the supply chain. One commonly referenced example is the case of a major automotive firm imposing a four-figure per minute fine on suppliers and trading partners that cause production lines to grind to a standstill.
To negate this, many companies further up the supply chain will carry overstock to minimise the threat of shortages. Because of the drive to increase margins and reduce inventory at the base, much of the necessary wastage gets pushed upstream.
There is the common conception that having an inventory surplus – be it components destined for a production line or a completed product ready to hit the shelves – is a bad thing. This is true, to a degree. From a strictly accounting view, it means unnecessary expenditure and wasted resources. However, to look at it from a different perspective, the same excess can act as a buffer against uncertainty. Finding the balance between the two, especially for upstream suppliers and manufacturers, is key.
Of course, guarding against excess inventory is not a simple process. Countless companies dedicate hundreds, if not thousands, of work hours to restrict its presence. Even a firm operating a lean supply chain can still suffer from issues associated with excess inventory. Everything from poor communication, unforeseen market conditions and minimum order values can cause surplus levels creep upwards.
These won’t be conscious choices, but over time they can cause problems and introduce inefficiencies to an otherwise seamless supply chain. It is often unavoidable and can be seen as a negative. Yet it doesn’t have to.
With careful planning and a willingness to extend the normal life of a supply chain, companies can introduce a new form of revenue to their business at critical points in the calendar.
The end of the calendar and financial years are an important time for many involved in the electronics sector. These points typically give both purchasing and logistics departments a chance to breathe and assess their plans for the future, all while completing the necessary paperwork. Ensuring that all parts of the supply chain are optimized and are operating efficiently can make or break upcoming financial results.
For those businesses with more excess than necessary, or what could be described internally as a surplus quantity of buffer stock, the choices are generally simple. Many opt to liquidate, which is the common method across numerous industries at handling the issue. However, this process can be ineffective and can increase short-term overheads on assets that marked red on a balance sheet.
Alternatively, companies throughout the supply chain could partner with a third party that specialises in excess inventory management. Unlike liquidation, this approach could ensure that those operating within a supply chain secure near-market pricing for their otherwise excess stock. There are other benefits too, such as the immediate removal of overheads, such as labor and warehousing costs.
Receiving as high a value for excess inventory is a significant advantage for all business, but especially so for those operating in margin-critical sectors.
Despite the best of intentions, inefficiencies and quantities excess stock will always be present for companies operating within a supply chain, no matter if they are the link or the last. Opting to see the surplus stock as a chance to recoup money and not simply as an unavoidable expense can be the difference between financial success and failure.
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- On December 6, 2017