The company’s most effective change, however, was the adoption of a set of initiatives designed to sell excess slow-moving inventory to customers, suppliers, and third parties. Read the article From cash sink to profit uplift And, only as a last resort, it sold excess inventory as scrap to reclaim the value of the materials used-typically 2 to 5 percent of the part cost for industrial products (Exhibit 2). It modified some obsolete parts to make them fit equipment that was still in service with customers. Some of the techniques were straightforward, such as moving parts to regions that actually needed them, or finding ways to incorporate parts into new equipment. In parallel, the company launched a second set of initiatives designed to release its excess inventory of slow-moving parts in a way that maximized residual value. And a purchase-order control tower stopped unnecessary orders for slow-moving items when sufficient inventory was already available. The company also improved its sales and operations planning processes to ensure the organization could react quickly in the case of order changes or cancellations. Cash metrics were included in the incentive schemes of its commercial and operations teams, and new measures limited SKU proliferation, discouraging minor equipment changes or new-product introductions with limited sales potential. A service-level review identified the most appropriate balance between the need to support installed equipment and the cost of inventory. Once the slow-moving culprits were identified, the company implemented a series of initiatives to cut off the source and prevent further unwanted accumulation of inventory. Then there was a growing pile of obsolete spare parts, including customized parts from cancelled orders and items inherited through acquisitions. Adding to high levels of inventory, operations teams kept large buffer stocks to make up for problems such as low forecast accuracy, lack of communication with sales teams, poor delivery performance by suppliers, and a limited view of the inventory held at different sites. Previous management incentives emphasized revenue and margins over cash, with commercial teams sometimes ordering two lots of parts for the same equipment at the same customer: one set for a basic scheduled overhaul, and an additional set of more advanced parts, just in case the customer was willing to pay more for better performance. Moreover, the usual challenges of the sector were compounded by internal process and management issues. As a result, slow-moving inventory fell by one-third in three months, and spare-parts revenue increased by about 3 percent overall at gross margins of more than 60 percent.īefore the company began the program, its aftermarket inventory had grown unchecked for years. Over a period of only six months, the company adopted a suite of measures to address the causes of inventory accumulation and stimulate sales of slow-moving parts. Time to get smarterįacing cash shortages, one large industrial-equipment manufacturer took a more nuanced approach to its spare-parts inventory. Puzzled sales teams typically respond in one of two ways, either ignoring the list in favor of bigger-ticket opportunities, or looking for the quickest, easiest ways to dispose of the inventory, so little of its value is recovered. Others hand over lists of excess inventory items to their sales teams and ask them to sell the items any way they can-without tailoring the lists to the installed base covered by each sales team. Many organizations’ approaches to tackle high levels of inventory don’t work very well, either because they address only part of the problem, or because they fail to recognize that the dynamics of slow-moving inventory are fundamentally different from fast-moving items.įor example, some companies attempt to impose an across-the-board reduction in inventory levels, but that can result in lost sales of fast-moving parts. And because customers operate equipment in different ways, demand for slow moving parts can be highly volatile, encouraging companies to take a “better safe than sorry” approach when it comes to setting inventory targets. Complex, highly-customized products with long operating lives mean that SKUs tend to proliferate over time, as companies attempt to stock components for every version of every item of equipment they produce. Slow-moving inventory is a particularly pernicious challenge for industrial players. These are parts that are rarely sold, but which the organization must hold in stock to meet contractual obligations or capture commercial opportunities when they arise. In our experience of working with the aftermarket arms of industrial OEMs, a large part of the challenge comes from the 10 to 40 percent of inventory made up of slow-moving items.
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