Expert Market Insight: Managing Excess Inventory

With over 25 years of industry expertise, Smith’s Todd Banker offers insight into the factors affecting the resale value of excess. Having worked his entire career at Smith, Todd has held many different positions including global inventory manager and global commodity manager for memory.

As part of an ongoing series, Smith’s thought leaders share their views on market forecasts and industry happenings.

Few things are as crucial to a manufacturer’s purchasing team as managing their inventory level. One aspect of inventory management is dealing with excess material that will not be used during the current forecast – nor, in many cases, in future projects. Figuring out how to regain value on this excess can be a headache at times, so developing repeatable methods and understanding the weak points of the process are necessary steps the team must undertake to liquidate the material as efficiently as possible.

There are a few main programs that open-market companies like Smith offer our customers to help them sell their excess, each solution with its own set of pros and cons:

• A line-by-line bid process where each item is evaluated and sold separately.
• A lot-buy purchase where multiple items are grouped together and sold at one price.
• A consignment program where the manufacturer ships the goods to the reseller and both companies share a percentage of the future sales the reseller makes with the materials.

In order to decide on which program to try, the manufacturer must not only weigh the pros and cons of each program, but also the price range they can expect to attain as recompense. Because that’s what this is all about – maximizing the resell of their products. Or, in most cases, minimizing a loss during the excess clearing.

That’s a hard thing to grapple with for most companies – monetary loss. But the reality is, most of the time that a company begins to sell excess product, the parts are not worth what the company paid for them, and the company is mitigating damage.

Why is this?

There are several reasons, including open packaging, product condition, the number of other viable end users, etc. But the factor that most people overlook that affects the resale of excess is time. And time is not your friend.

Time affects the value of products in multiple ways. First, there are date codes. The industry-standard accepted date-code restriction is two years, though many EMSs shorten that to 18 months. Once the date code of parts exceeds that standard, the parts devalue tremendously.

Then there’s MSL – moisture sensitivity level. MSL is especially important on BGA products like high-valued processors or discrete memory chips. If a factory pack has been opened but not properly resealed, the parts can be corrupted. Customers who did not have the parts within their grasp at the time the packaging was broken will not pay top dollar due to the uncertainty of the repackaging – they have no idea how long those parts were negatively exposed.

Then there’s the swiftness with which new technology is introduced, matures, and becomes obsolete – both the electronic components and the consumer products they help create. Many components have little evolution, including passives like capacitors or connectors and many board-level components like logic ICs. Change and obsolescence aren’t big factors for these parts. But with memory components, CPUs, ARMs, and high-end microcontrollers, the time in which they are mainstream is normally finite, and products that do not have an end usage are nearly worthless. And, of course, consumer products are constantly being upgraded, redesigned, and improved. Thus, the time in which their essential component parts have value is limited. A manufacturer must understand where in the lifespan of those technologies they stand and how that limits the need and pricing of their excess.

Lastly, the timing of a purchase and the market conditions during that buy play a significant factor in a product’s value. During 2016, 2017, and 2018, the industry experienced a widespread memory shortage. In 2018, MLCCs went on allocation, lead times lengthened extensively, and direct pricing increased 20-30%. Currently, the computing segment is having problems with Intel CPUs, which – by extension – also negatively affects the memory makers and storage manufacturers. During these periods of shortage, pricing is usually elevated for the allocated items, versus normal, quieter times. Trying to sell parts that were bought during a shortage once that shortage is over (and while prices are declining) will often lead to monetary loss. Even buying parts after the shortage is over and during a pricing decline (before it bottoms out) will often lead to monetary loss because the market is still soft, and pricing is trending to a negative return. So, whether the market price is going up or down, a company left with excess bought while a shortage was causing pricing volatility is often stuck behind the eight ball with no positive outcome possible.

For these reasons, we stress to our customers the importance of working to sell their excess as soon as they realize it’s excess. Procrastination will only lead to lesser returns, especially on volatile commodities like memory or storage devices, and waiting for too long can lead to no returns at all – particularly on items with old date codes or open packaging. Having excess is never a desired scenario, but there are ways to minimize the damage holding it can do.

Contact Smith for help evaluating your excess and determining your optimal solution.