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 and worthless. 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

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 Summerise
If your company wants to improve ROA then excess inventory is the first place to start.

If you have a list of your excess prepared please email to (excel format perfered) purchasing@cobwebelectronics.com

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