Excess can be the bane of any inventory manager's life. When excess morphs into obsolete stock, it can totally destroy profitability. It is important to stay on top of it.
But what exactly is Excess?
Some definitions of more use
One definition with which you may be familiar is the one often used by your finance department. It normally revolves around how much stock you have that has not moved in 12 / 24 months. It is not a very useful measure except that it can be used to help sheet home the blame for the excess that is gathering dust on your warehouse shelves.
A better way to define excess is that stock which is surplus to future requirements. There are two very important words here: future and requirements.
Rather than screen stock against past sales and usage, it is very important to compare what you have in stock against what you need in the future i.e. so you can consider the effect of promotions, declining sales at end of life and the like. Being a great performer in the past is no guarantee of continued sales.
Important to micro-manage
Unfortunately the scale at which a CFO might evaluate excess can be fairly useless. You don't need to know what is happening (or not happening) with every item in your product portfolio to report on excess or to prepare an obsolescence provision. But to avoid excess forming you absolutely must manage at the individual item level and be proactive.
What does that mean? Well, for example, if you have an item that only ever sells in fours, if you have five in stock, then you in effect have an excess of one. If you have three in stock then all three are in excess because you need at least four to be of any value.
What else might be important to consider? If for example a part has a high MOQ or Pack Size you might be forced to order a lot of excess to even participate in the market? Do you have the option to buy a part from an alternate supplier who might not insist on an MOQ but might charge a bit more per unit?
What about the way you cater to the demand? If the demand signal is interspersed with some BIG orders do you incorporate all that demand into what must be covered by the stock in a warehouse? If you do include all the BIG orders then you could easily double or triple your stock levels. Might there be a better way to handle the BIG orders? Could you hold them higher up the supplier chain? Or perhaps at a nearby support warehouse? If there are better ways to approach inventory placement and you are not embracing them, then you probably need to ask the question, "Why is there excess?" and you may need to accept a confronting answer.
Why is the excess?
Ultimately it is important to probe your supply chain and inventory management practices and establish what exactly are the root causes of your excess?
In many cases you may well find that you simply do not have the capabilities to properly manage any excess you may have. That may mean you have a problem with KPIs and incentives or a problem with culture (Yes, some people may not care about excess or its proliferation).
Has someone placed a manual override on the min-max levels that is excessive? Is there accountability and review of these overrides?
Does every pocket of excess get reviewed daily to make sure excess does not fester and grow? If you identify the excess stock, do you then move it to where it is better placed, where it might actually move? How quickly can this be done? Is the move justified?
Do you have the capabilities to determine whether you ought to split incoming POs at the source supplier and split them across multiple importing warehouses? Should you be optimising cross docking so you can cost effectively split big imports across multiple warehouses?
What benchmark do you use for recognising excess that needs your attention? Choose the wrong one and you start behind the eight-ball.
And most certainly the same target for all parts is not the way to go either. If you say that you will get alarmed once you hit 6 months then for really fast movers you may being alerted way too late and for really slow movers you might be generating noise that makes life difficult and does nothing for genuinely reducing excess.
And maybe you have excess because of a combination of factors. Think about the great deal to buy a lot of stock for 10% off for a branch manager paid to maximise gross profit but with no accountability for the excess. What about the volume rebate you pursued with scant regard for the product mix and where it might be reasonable to take a risk on some excess?
Maybe the ultimate questions to ask are "Why haven't we asked Why more often?" and done something about it?