Obsolete Inventory (#66)
/In this podcast episode, we discuss how to identify potentially obsolete inventory, who should examine it, and how to get rid of it. Key points made are noted below.
If you have inventory, then some of it is obsolete. Period. If you don’t think so, then you’re not investigating it very well. The trick is to form a group who’s responsible for obsolescence, then creating a system for finding it, and then figuring out how to dispose of it.
The Materials Review Board
The group you need is called the materials review board, or MRB. This group has members from every department that has something to do with inventory, which means someone from accounting, engineering, logistics, and production. For an example of why you need so many people, the engineering staff may want to keep some parts that they’re incorporating into a new product design. Or, the logistics department knows that it’s impossible to obtain a particular part, so they’d rather hang onto it for service parts use.
This group is responsible for periodically reviewing the inventory, to see what goes and what stays. To do this, they need information about which items are obsolete. There are several ways to get it.
The Where Used Report
The best way is what’s called a “where used” report, which is really common in material requirements planning systems. It’s a report that lists all of the bills of material in which a part is used. If there’s no “where used” bill for an inventory item, then it’s not being used anywhere. Kind of good key indicator of obsolescence. To make it work better, make sure you deactivate any bills of materials for products that are no longer being manufactured.
The Last Date Used Report
Another option is the “last date used” report. It’s not a common report in most manufacturing software packages, but it’s easy enough to create with a report writer. All you want is the product name and number, the quantity on hand, and the last time the item was used. Then sort the report so that the oldest items go first.
Now, this report will tell you if something hasn’t been used for a long time, but it doesn’t tell you if it will never be used again, since it might be a critical part of a product that’s coming up for a new production run in the future. So use it with care.
Use Old Count Tags
But what if you don’t have an inventory tracking system, or you don’t think you can rely on it? Well, if you do a year-end physical inventory count, then just leave the count tags on the inventory items. If items get used later in the year, then the tags will be thrown away. But if they aren’t used, then you can tour the warehouse a few months later, and just see which items still have tags on them.
This is an imperfect method, since lots of tags will be ripped off by mistake – after all, the warehouse is a high traffic area. Also, if a whole box of parts has a single count tag on it, then the warehouse staff can easily work around the tag and still remove parts from the box. So, be careful in using this technique.
Examine Engineering Change Orders
One last possibility is to look at the engineering change order records in the engineering department, or ECO. The ECO describes what new part is replacing an old part on a product, because the engineering staff redesigned the product. So, comb through the records and figure out which items have been replaced.
What to Do Next
So – we have several methods for locating obsolete inventory. What do we do with it? The next step is to summarize it for the materials review board. To do so, list in a single report the name of each item, with the warehouse location, quantity on hand, the last year’s usage total, the planned usage total, and the extended cost of what’s on hand right now.
The MRB really wants to know about that last item, the extended cost. This is the company’s investment in the inventory, and the MRB should really focus on the big dollar items. Incidentally, if the warehouse is packed with inventory, the MRB may actually be more interested in the cubic volume of storage space taken up by the obsolete inventory – so the report could contain that information, as well.
The MRB then decides on whether to dispose of the obsolete inventory, when to do so, and also how much of it to get rid of. In many cases, the logistics department still wants to retain some, because of service parts needs. So, the MRB has to create an authorization memo that states all of this information. Once it’s complete, the logistics department has to dispose of it. And the sooner the better, since inventory drops in value over time.
Disposing of Obsolete Inventory
And how do we dispose of it? One of the best ways is to have the service department call customers and see if they’d like to buy it as service parts, which means you can sell it at a good price. It may also be possible to return the parts to the supplier, though there’s always a restocking fee, usually in the range of 15 to 20 percent. Sometimes the supplier only issues a credit for them, so you’re still stuck with buying something else from the supplier with the credit.
Of course, there is always ebay.com, or any other on-line auction service. This works pretty well for consumer goods, not so well for anything else. Another option is to bring in a salvage contractor, though they only pay a fraction of the total value of the inventory. If you use one, make them buy in bulk, and not pick over the inventory for the real values. That way, you can dump more inventory on them.
And finally, you can also donate the inventory to a non-profit, and take a tax deduction. It can take some time to find a good recipient, so this is a labor-intensive option that many companies just don’t bother with.
And finally, it’s actually better to throw obsolete inventory into the dumpster than it is to keep it in the warehouse. That way, you free up shelf space for other inventory, and you no longer have to insure it.
Preventive Measures
Now, what about preventive measures, so that inventory never becomes obsolete? A good one is to have the logistics department review any upcoming engineering change orders in advance. That way, they can draw down existing stocks with a final production run, and then implement the change order.
Another option is to require the engineering staff to only design from an approved parts list, so fewer parts get used on many products. And finally, you’ve got to keep the purchasing staff from buying in bulk. Even if it’s a great deal on something, you just don’t want a two-year supply of a part sitting on the shelf. The longer something is in the warehouse, the better the chance that it’ll become obsolete.