5.3 Excess & obsolete (e&o) inventory

Excess and Obsolete (E&O) inventory is not merely a warehouse storage challenge; it represents a significant financial concern often stemming from MRP planning discrepancies, engineering design volatility, or unmitigated commercial risk. Idle material ties up working capital, occupies valuable floor space, and can mask systemic operational inefficiencies. While the warehouse manages the physical material, resolving E&O requires upstream coordination with Sourcing, Planning, and Engineering.

E&o classification logic

Relying on subjective assessments to identify aging inventory is ineffective. Implement data-driven definitions within the ERP to systematically flag items for disposition.

Excess (the “slow moving” inventory)

Inventory where the On-Hand Physical Quantity exceeds the projected MRP consumption for a defined horizon (e.g. the next 12 months).

• The Logic: Calculate excess by subtracting the 12-month MRP forecast from the on-hand quantity. Any remaining balance is considered excess.
• Root Causes: Large Supplier MOQs, overly optimistic sales forecasts, or high minimum production run sizes.

Obsolete (the “dead” inventory)

Inventory with zero projected MRP demand and no active BOM link to a saleable product.

• The Logic: A component is considered obsolete when there is zero forecasted demand, it has not been used in a build for over 12 months, and it is no longer linked to any active Bills of Materials.
• Root Causes: Engineering Change Orders (ECOs) executed without a phase-out plan, End-of-Life (EOL) product transitions, or significant customer order cancellations.

Prevention & upstream governance

The most effective way to manage E&O financially is to prevent it from entering the supply chain initially.

MOQ vs. demand governance

If a supplier MOQ forces a purchase that exceeds a reasonable consumption horizon (e.g. > 12 months), the ERP should ideally flag the Purchase Order (PO).

• The Action: The Procurement team should seek formal approval from functional management (e.g. Supply Chain Director or Finance) to accept the financial risk before processing the PO.

The engineering change (ECO) lock

When releasing new board revisions, Engineering should consistently evaluate legacy stock levels.

• The Guideline: A PLM Engineering Change Order (ECO) should typically include a “Material Disposition Plan” for the old revision. Options usually include:
  1. Exhaust: Build out the old BOM stock until depleted, then transition to the new revision.
  2. Rework: Manually modify the old stock to meet the new specification.
  3. Scrap: Acknowledge the financial loss associated with transitioning immediately.

Customer liability (NCNR) agreements

For custom, proprietary, or unique parts (Non-Cancellable, Non-Returnable - NCNR), the financial liability should ideally rest with the customer driving the requirement.

• The Guideline: If a customer cancels an EMS build, promptly initiate discussions regarding the financial liability for stranded custom materials.

Disposition pathways (the cleanse)

Once E&O is identified, holding the material indefinitely is rarely optimal. Components degrade over time, and market value typically decreases. Establish clear paths for disposition:

Path a: return to supplier (RTV)

• The Condition: Parts are standard commodities and within the vendor’s return window.
• The Action: Negotiate a return, even if it entails a restocking fee. Recovering partial value is financially preferable to a total future write-off.

Path b: cross-plant transfer

• The Condition: Another internal site utilizes the same ERP part number.
• The Action: Transfer ownership internally. The freight cost is generally lower than procuring new stock externally.

Path c: market resale (the broker market)

• The Condition: The parts are standard global commodities (e.g. ICs, MLCCs) with open-market demand.
• The Action: Consolidate the material to offer to independent distributors, anticipating a fractional cost recovery.
  • Pro-Tip: Ensure your company policy allows for resale without requiring a certificate of destruction; selling parts assumes transfer of quality liability.

Path d: physical scrap (the end)

• The Condition: Custom parts, expired chemistry, or components with zero market value.
• The Action: Dispose of the material to ensure it cannot accidentally re-enter the production supply chain. A signed Certificate of Destruction (CoD) is often required for compliance and accounting purposes.

The e&o review process

Provide clear visibility to executive management to drive timely financial decisions regarding E&O.

Report specification

Configure the ERP to generate an unfiltered E&O dataset containing these key elements:

ERP Field	Technical Definition	Operational Value
Part Number	The ERP Item ID	Identifies the material.
Total Value ($$$)	Qty * Standard Cost	Shows the financial impact.
Months on Hand	Qty / Avg Monthly Usage	Indicates the severity of the excess position.
Last Usage Date	Date of last MRP BOM consumption	Highlights inactive or dead stock.
Owner / Originator	Assigned Buyer/Planner	Establishes accountability for disposition.
Reason Code	MOQ / ECO / Sales Drop / Expired	Helps identify structural root causes.
Action Plan	RTV / Resale / Scrap / Hold	Tracks the required steps for resolution.

Final Checkout: Excess & obsolete (e&o) inventory

Control Point	Engineering / System Requirement	Target Goal
Definition	ERP utilizes clear time horizons for E&O.	E.g. > 12 months = Obsolete.
Ownership	Departments share responsibility for E&O.	Engineering aids in ECO-driven obsolescence.
Prevention	NCNR risks are flagged before PO creation.	Management review for high-value NCNRs.
Disposition	Establish timelines for E&O decisions.	Move beyond “holding” to active resolution.
ECO Discipline	PLM changes require inventory phase-out logic	Documented disposition plans.
Review Cadence	Regular cross-functional E&O reviews.	Conducted monthly or quarterly.