Expert Insight: Guest Contribution
  By Dr. Edward J. Marien and John Kenny  
  March 19 , 2007  
  Inventory Management:  Improve Product Lifecycle Profitability with End-of-Life Progressive Inventory Disposition (Part I)  
  Focusing on the end of a product's lifecycle can have a dramatic impact on the bottom line, especially for high tech manufacturers  
Dr. Ed Marien Says:
Most companies ignore End-Of-Life inventory management, leading toward major tie-ups of cash.

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Many major electronics OEMs are focusing increased attention on managing End-Of-Life (EOL) inventories to increase Product Life Cycle (PLC) profitability.  One major manufacturer of computer servers and mainframes sees opportunities to address approximately $500 million of Slow Moving and Obsolete, so-called SLOBS, to add earnings per share. 

Most companies devote major resources toward PLC new product development and early-stage growth opportunities with little attention to products that are past PLC maturation and in the decline stage leading to termination, if companies even make the hard decisions to terminate products.  Learn some of the key issues and processes incorporating an economic framework being utilized by major electronic manufactures to reduce price erosion during the PLC, to improve cash flows, to define and reduce variable and indirect operational costs associated with managing SLOBS inventories in their own firms and in trade channels.  Models must go beyond traditional EOQ and accounting models that assess cost impacts based upon costs sourced on a highly aggregated basis. Granularity in costs must be addressed in order to make good decisions and reap maximum profit opportunities.

Key Issues and Thresholds of Opportunities in Managing End-of-Life  Inventories

Most companies ignore End-Of-Life inventory management, leading toward major tie-ups of cash.  With pressures from sales to offer broad product lines and customer-specific Stock-Keeping-Units (SKUs), most firms continue to add more products without properly managing products that are experiencing declining sales with some products getting less than one sales hit per year after three years.  As products mature and go into declining sales, inventories increase and prices erode rapidly with increased promotional expenses to sell company inventories and clear trade-channel inventories.  As product demand further declines, inventories further increase as channel trade parties return products forcing firms to begin to dispose of inventories through liquidation sales at often ten cents on the dollar and eventually scrap products.  Many firms, especially in highly technical industries such as electronics, are moving aggressively to make markets earlier in the EOL stage and seek higher prices resulting in increased PLC product profitability of SLOBS.

Setting the stage for EOL Progressive Inventory Disposition

To progressively manage EOL SLOBS, top management must specifically allocate resources—people, process and technology or outsource services to increase cash flows from SLOBS.  With most product managers experiencing shorter Product Life Cycles (PLCs), devoting little resources to manage increasing inventories resulting from engineering changes and increased competition, many firms are redesigning End-Of-Life processes to more effectively deal with declining sales, rising inventories and ineffective methods for terminating product SKUs and lines.  With inventory carrying costs approaching 50% and more in managing the production, inventory levels and logistics deployment, high levels of product returns, poor EOL SLOBS inventory management results in lost profits.  Using EOL progressive inventory disposition processes is helping to increase cash flow with reduced price erosion by as much as 100%, reduced costs in making better markets for SLOBS, and in reducing inventories.   

What is EOL Progressive Inventory Disposition?  

This article illustrates an improved EOL progressive inventory disposition process along with an analytical economic assessment model to establish policy-making, and to evaluate the use of Web-based processes to gain maximum return from selling and deploying inventories in an efficient and timely manner.  Management must aggressively take advantage of today’s PLC progressive inventory management techniques to gain lost cash.  Instead of waiting till the last minute, firms are establishing supply chain visibility systems to identify trading party inventories along with the OEM’s inventories and to monitor sales levels.  As sales drop off and inventories begin to build, OEM and trading party Sales & Operations Planning teams need to take steps to maximize returns from remaining products in the supply chain.  Previously firms would passively watch inventory and use promotional techniques to clear these inventories.  A small inside inventory management team would have a few favorite brokers that they would contact to get the best price available for useable products that have been obsoleted by new or competitive products.  Often these firms would receive only 50% of the potential if the firm had addressed the falling sales earlier and began to make markets for these still useable products. 

An effective, analytical framework should address various types of supply chain inventories within the firm’s control and within the firm’s marketing channels for various types of trading parties.  A granular approach to costing over the life of the product is proposed instead of aggregating costs into all-inclusive variable costs such as cost estimates used in traditional Economic Order Quantify (EOQ) models in which costs are assumed to vary with the number of shipments processed or in the number of units produced with in the variable cost per unit of production along with an estimate of inventory carrying costs.  Not all costs are variable.  In addition, models of this nature do not take into account the time value of cash flows associated with invested cash and cash sales flows.

In Part 2 of this series, we'll provide explore in more detail what the drivers of inventory levels in high tech, electronics and many other discrete manufacturing companies, and present a model for costing inventory.

Edward J. Marien, Ph.D: As emeritus professor, University of Wisconsin-Madison School of Business Executive Education, Ed provides instructional activities at the UW and customized programs for individual firms in a wide array of vertical industries.  He has assisted manufacturers, distributors and third-party logistics services providers in developing and implementing business, T&L and SCM strategies to improve service, reduce costs, and increase asset utilization. 

John C. Kenny: Prior to his appointment in 2004 as FreeFlow’s President, John spent 28 years in senior global operations positions in Sales, Manufacturing and Supply Chain in both high technology and consumer products industries.  John has held senior operations executive positions with 3Com, Hewlett-Packard, Apollo Computer, Joseph E. Seagram & Sons, Inc. and Standard Brands Inc.  

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