As the economic recession deepens consumers continue to curtail spending, particularly in discretionary categories such as consumer electronics. Weak holiday sales have contributed to billions of dollars of excess inventory piling up around the globe. The situation is reminiscent of the 2001 high tech crash when even the most efficient supply chain leaders such as Cisco were writing off $1B+ in inventory. Consider the following statistics I read in a Business Week article published a few days ago:
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US Sales of electronics and appliances fell 26% year-over-year from November 1 to December 24
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Semiconductor inventories are expected to reach $10.2B by close of December, up from $3.8B in September
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TV industry has about eight weeks of inventory when as compared to required levels of 4-5 weeks
Although the economic recession has greatly contributed to oversupply in recent months, 2009 is not the first year industry has suffered from a post-holiday glut of excess inventory. In fact, every year, billions of dollars of excess inventory are moved through the supply chain at a great expense to the manufacturers, distributors and retailers selling the goods. In addition to the drag on corporate earnings, excess inventories also have a negative contribution to the environment by unnecessarily consuming energy during the manufacturing, transportation and warehousing efforts.
How much excess inventory exists at any point in time? As far as I can tell no one really knows. I have seen estimates ranging from $100 Billion from AMR Research to a high point of over $1.5 Trillion from a technology vendor called Just Enough. The greatest excesses seem to be concentrated in a few specific categories such as non-perishable foods; seasonal apparel; and consumer electronics.
What happens to Excess Inventory?
The fate of excess inventory depends upon the type of product and the reason it was not sold. Some products, such as books or DVDs, may be returned to the manufacturer then re-circulated back into the channel. If a product was damaged, expired or no longer retains any useful value then it will likely be destroyed. Products with relatively low market value such as discontinued food items may be donated to charities. Destruction, donations and returns, however represent the minority of outcomes for excess inventory. However, most overstocks are liquidated through secondary channels.
eBay's Reseller Marketplace
Excess inventory is sold, often at a significant price reduction, to online and offline discount retailers. Middlemen such as brokers and wholesale distributors provide services to place excess inventory with different customers around the world. Some of the middlemen are purely virtual leveraging electronic marketplaces which auction overstocked goods online. During the dot com era over twenty new start-up marketplaces were launched specifically for sales of excess inventory. Most marketplaces have discontinued operations due to a failure to realize their business plan. Nonetheless, significant efficiencies were introduced to the liquidation process through online auctions. Marketplaces increased price transparency through expanded information flow amongst buyers and sellers.
Globalization has expanded efficiencies in the marketplace for excess inventory as well. Many overstocked products are sold overseas buyers, which resell the merchandise in foreign markets. The factors driving sellers to liquidate in foreign markets are not related to consumer demand, but rather contractual and regulatory structures in the retail value chain. Manufacturers of consumer products typically will place “anti-dumping” terms and conditions in contracts with retailers. As a result, retailers have a minimum price below which they cannot sell the merchandise. Such terms ensure that a manufacturer’s brand value is not degraded by aggressive discounting. For inventory which must be heavily discounted to sell, the only alternative is to transfer the product to a foreign market for resale. For more details Richard Hastings comments in the CNN.com article US Sellers to the World: Please buy our Leftovers.
Root Causes of Excess Inventory
In certain scenarios, manufacturers deliberately stock the channel with excess inventory as a strategy to optimize their cost elements or to increase customer satisfaction. Supply chain planners, lacking insights into end-customer behaviors, decide they would rather have too much of a particular product than not enough. More common, however is that manufacturers often have overly optimistic sales forecasts for their products. Root causes for forecasting errors can include unexpected changes to customer demand caused by disruptive technological innovations, changing consumer tastes or unexpected weather patterns. In the case of 2009 the excesses are primarily being driven by deteriorating macroeconomic conditions.
Overstock.com
How to Reduce Excess Inventory
Technology and globalization have enabled the consumer products industry to become extremely efficient at finding buyers for excess goods in the past ten years. However, the tremendous volume of excess inventory in the market today indicates that the end-to-end supply chain is grossly inefficient. Liquidation of excess consumer goods through the secondary market results in double the supply chain effort with, at best, only half of the desired financial contribution.
Excess inventory will never be completely eliminated, but it can certainly be reduced substantially by more efficient supply chain practices. Techniques such as demand driven replenishment models can be utilized to reduce excess inventory. Demand driven replenishment processes enable manufacturers to link production volumes to end-consumer demand. As a result, the quantity of a SKU manufactured is much more closely aligned with what consumers wish to buy.
Of course, a key foundation to demand driven supply chain models is the ability to share demand signal data between retailers and suppliers. B2B e-commerce technologies are being leveraged today to share a wide variety of demand signal data including point-of-sale, loyalty card, market basket and consumer demographics information. B2B technologies can arm supply chain planners with real-time inventory data on which to base decisions upon. EDI and XML can be used to provide visibility to inventories on-order, on-hand, in-transit and in-stock at manufacturing plants, distribution centers and retail stores. This is yet another example of EDInomics principles at work in the supply chain.
