Value Recovery Solutions for Surplus Inventory (9:20)

Unexpected surplus inventory can take a financial toll on electronic component manufacturers and service organizations – and at a faster rate than ever before. Due to the rapidly changing pace of technology, the velocity of turning surplus inventory into recovered value is critical. If companies don’t have a risk mitigation strategy in place to move quickly, their excess could result in a loss. Depending on the parts and the size of the order, that may well mean a million dollar hit to the bottom line. In this podcast, industry veteran Scot Hennessey discusses different value recovery solutions for companies carrying surplus inventory and offers tips about what capabilities to look for in an excess mitigation partner. Download

Transcription 

Scot Hennessey:

“…the impact from a financial standpoint one way or the other could be devastating.”

Paul Gillin:

That’s Scot Hennessey, Director of Sales for the Americas at Converge, describing how unexpected surplus inventory can affect electronic component manufacturers and service organizations. While companies may not plan to end up with excess inventory, the reality is surplus is just as much a fact of life in the electronic components industry as shortages are. Smart companies plan risk mitigation strategies before the surplus situation even occurs, so that when it does occur they are ready to move quickly.

In this Converge podcast we will find out what leads to surplus inventory and cover some of the value recovery solutions that can help mitigate the financial risk it carries. Hi, I am your host Paul Gillin and I am speaking to Scot Hennessey who has extensive experience helping Converge clients navigate the potential pitfalls of component surplus.

First let’s start with the basics. Scot, what qualifies as surplus inventory?

Scot Hennessey:

It’s inventory that the manufacturer finds themselves with in excess of their forecast. In many cases, if not in all cases, you have a hard time returning that material to the component manufacturer that you bought it direct from or your franchise distribution partner.

Paul Gillin:

How do electronics manufacturers and service companies find themselves with large amounts of surplus inventory? We’ve learned that external factors like natural disasters can cause production problems that lead to shortages. Do those same types of events have anything to do with surplus?

Scot Hennessey:

The natural disasters that take place absolutely can take a toll. It will challenge their forecasting. It will challenge their supply chain expertise because it’s a moving target. We see companies as they start to see product constraints and notifications come their way. They up their forecast and their buying plans and get aggressive and sometimes book one, two, three times the amount of product that they need, in hopes that one of those suppliers is going to come through and actually deliver. What can happen if they all deliver, or if the market turns quickly and things normalize, that company can find itself obligated to all of those suppliers for that product and have to take delivery, and therefore find itself in an excess situation.

Paul Gillin:

So what is the risk for companies that find themselves with a significant amount of surplus inventory?

Scot Hennessey:

The risk is a hit to the bottom line. Companies could be hurt economically. They’ll have to take losses on that inventory, because as it ages, its value deteriorates – sometimes very, very, very quickly from whatever the cost was to perhaps zero. So the impact from a financial standpoint one way or the other could be devastating.

Paul Gillin:

Now Scot, you have spent two decades helping companies navigate and mitigate this kind of inventory risk. What can companies do when they find themselves in a surplus situation?

Scot Hennessey:

Manufacturers can post inventory internally to their other sister companies or even sites that might be part of their organization from an international or multi-regional standpoint. But that takes time, it takes effort, it takes constant maintenance as well. It actually takes a lot of muscle to manage a program like this. If you were to take inventory in a list form and post it somewhere, that inventory would be a static list of material that companies or buyers would have to find. There would be nothing necessarily to attract a buyer to that portal or to that inventory, that website, whatever it might be, and then to qualify that potential buyer is also a big issue. My suggestion would be that you look at an independent company whose core competency is not manufacturing, is not necessarily component production, but surplus mitigation.

Paul Gillin:

And once a company realizes that it has a surplus problem, how soon does it need to be addressed?

Scot Hennessey:

When you first realize that you have a problem, if you address it immediately, you may very well end up with a better end result than if you were to wait. Technology changes quickly and typically the longer you hold on, or the longer it takes you to make a decision to act to mitigate that issue by partnering perhaps with an independent like Converge, you end up losing value over time.

Paul Gillin:

So the first thing to do is to act quickly. Then what happens next? What mitigation strategies does Converge offer for companies that need to recover value from surplus inventory?

Scot Hennessey:

There are typically three options that we propose and they all start at the onset with an inventory analysis. We need to understand what type of product we’re dealing with, the characteristics of that product, such as packaging, date code, the quality overall of that material, does it have traceability, things like that. And once we have a good idea of the value and condition of the inventory, we can make a recommendation as to what path a customer should go down. The first path we consider, depending upon the nature of the customer and their needs, we have a consignment program, which is what we promote most often. And it’s because in a consignment scenario both customer and Converge are aligned perfectly with the same interests. It’s in our interest and the customer’s interest for us to sell the product at its highest return because that gain share will yield that much more to each of us. So we try to encourage companies to pass the responsibility of packing, shipping the inventory, marketing the inventory to Converge so that we can field the calls, qualify the potential customers, manage the transactions, and simply cut them a check halfway through the month every other month.

Paul Gillin:

That sounds like a win-win scenario. Can you tell us about the other two value recovery options?

Scot Hennessey:

Of course. We have the outright buy solution which offers the ability for the customer to get inventory off their books immediately by selling the product as a complete lot. That is a good solution for companies that are looking for immediate resolution to their inventory problem. Let’s get it off the books and collect immediate revenue or cash from that sale. And there’s a third option which would allow a customer not to sell the product outright and not to consign the product by giving Converge possession, but to keep the product in house but provide Converge a list of material that we can then input to our systems internally and go to market with that material in hopes of trying to find a customer to buy it. In that case, its leveraging Converge’s market knowledge, their systems capabilities, the global footprint, the sales expertise that we have, and the customer base and partnerships that we have available to market product to.

Paul Gillin:

Obviously, there are other independent distributors that offer excess inventory help as well. They range from large to small and advertise services that are similar in some regards, but very different in others. The companies that are looking for surplus solutions need to be able to wade through all the advertising claims to find the organization that can best meet their needs. What do you recommend that companies look for when searching for a surplus value recovery partner?

Scot Hennessey:

They should consider the size of the organization, the global reach of the organization. How many customers does the partner potentially have to engage to sell product to? The community of partners is ultimately what you leverage to gain demand for any inventory that you’re going to look to try to market and sell. That involves commodity management expertise to try to price product effectively, to identify verticals and customer segments that might be interested in capitalizing on the purchase of some excess inventory. You also need a global workforce that can operate 24-7 to sell to the different regions that we do business in such as APAC and EMEA as well as here in the U.S.

Paul Gillin:

In closing, is it possible for companies to prepare for surplus inventory before it even happens? And if so, how can they get started right now?

Scot Hennessey:

Planning, just like forecasting, is critical. You plan for your product, you plan the design, you plan the production, you don’t necessarily plan to have problems, but you should bake in the idea that you could in the form of excess, in the form perhaps of shortages, but either way, there should be an outlet for you to capitalize on or engage should you find yourselves in a surplus situation. Remember, it’s important that you act quickly to maximize your return. If you’ve had a partner that you’ve vetted that you’ve built a relationship with and trust, it’s a long-term partnership that’s ready to take action no matter what the needs are, and to do it effectively and in a trustworthy fashion.

Paul Gillin:

Great advice. Scot thanks so much for sharing your expert insight. And thank you for listening to this Converge podcast, “Value Recovery Solutions for Surplus Electronic Components Inventory.” My name is Paul Gillin.