5.3 Excess & Obsolete (E&O)

Excess and Obsolete (E&O) inventory is not a storage issue; it is a financial pathology caused by planning errors, engineering volatility, or unmitigated risk. When material sits idle, it does not just lose value; it consumes working capital, occupies revenue-generating space, and hides operational inefficiency. The warehouse is merely the victim holding the evidence. The root cause—and the solution—resides with Sourcing, Planning, and Engineering.

E&O Classification Logic

Do not rely on vague feelings about "old parts." Implement a hard mathematical definition to trigger action. Run this logic monthly against the entire stock listing.

Excess (The "Slow" Death)

Inventory where the On-Hand Quantity exceeds the projected consumption for a defined horizon (typically 12 months).

• Logic: If (On-Hand Qty) > (Forecast Next 12 Months), Then Excess = On-Hand - Forecast.
• Root Causes: MOQ overbuys, optimistic sales forecasting, or minimum production run constraints.

Obsolete (The "Dead" Weight)

Inventory with zero projected demand and no valid parent BOM structure.

• Logic: If (Forecast = 0) AND (Last Usage > 12 Months) AND (No Active BOM), Then Status = Obsolete.
• Root Causes: Engineering Change Orders (ECOs) without exhaustion plans, End-of-Life (EOL) product transitions, or customer cancellations.

Prevention & The Governance Firewall

The best way to manage E&O is to prevent it from entering the building. Implement these gates upstream.

MOQ vs. Demand Governance

If a Supplier MOQ forces a buy > 12 months of usage, the ERP must block the PO.

• Action: Buyer must secure written approval from the Finance Director or Business Unit Manager accepting the residual risk before placing the order.

The Engineering Change (ECO) Lock

Engineering often releases new revisions without checking legacy stock levels.

• Mandate: No ECO is valid without a "Material Disposition Plan." The Engineer must select one:
  1. Exhaust: Use old stock until zero, then switch.
  2. Rework: Modify old stock to new spec.
  3. Scrap: Immediate write-off (requires cost acceptance by Engineering budget).

Customer Liability Agreements

For custom/unique parts (NCNR), the liability belongs to the customer.

• Action: If a customer cancels or pushes out a build, immediately trigger a liability claim for the stranded material. Do not "wait and see."

Disposition Pathways

Once E&O is identified, holding it is the worst option. execute the following disposition hierarchy aggressively. Speed is critical; electronic components degrade, and market value drops over time.

Path A: Return to Supplier (RTV)

• Condition: Parts are standard, active, and within the return window (usually < 30–60 days).
• Action: Negotiate a return, even with a restocking fee (15–25%). A 25% loss is better than a 100% write-off later.

Path B: Cross-Plant Transfer

• Condition: Another manufacturing site uses the same part number.
• Action: Transfer ownership at book value. Logistics cost is usually lower than buying fresh stock.

Path C: Market Resale (Broker)

• Condition: Parts are standard commodities (ICs, Passives) with market value.
• Action: Bundle the list to independent distributors. Expect 5–20% cost recovery.
• Pro-Tip: Ensure the broker certificate of destruction is not required; if you sell it, you lose control of the chain of custody.

Path D: Physical Scrap

• Condition: Proprietary custom parts, expired shelf-life materials, or zero market value.
• Action: Physically destroy the material to prevent it from re-entering the supply chain. Certificate of Destruction (CoD) is mandatory.

The E&O Monthly Report

Management requires visibility to force decisions. The monthly E&O Review is not a status update; it is a decision meeting.

Report Specification

Generate a standard dataset with the following columns:

Field	Definition	Purpose
Part Number	ERP Item ID	Identification.
Total Value ($)	Qty * Std Cost	Financial Impact.
Months on Hand	Qty / Avg Monthly Usage	Severity Indicator.
Last Usage Date	Date of last BOM consumption	Detects dead stock.
Originator	Buyer/Planner Name	Accountability.
Reason Code	MOQ / ECO / Sales Drop / Expired	Root Cause analysis.
Action Plan	RTV / Sell / Scrap / Hold	Mandatory field. No blanks allowed.

Final Checklist

Control Point	Setting / Rule	Non-Negotiable
Definition	Time Horizon	Material with 0 demand for 12 months is Obsolete.
Ownership	Financial Hit	Write-offs are charged to the Department that caused them (e.g., Engineering for ECOs, Sales for Forecast error).
Prevention	NCNR Flag	All NCNR orders > $5k require explicit risk sign-off.
Disposition	Action Limit	E&O Report items must have a decision within 60 days. "Reviewing" is not a status.
ECO Discipline	Phase-In/Out	New revisions cannot be released to purchasing without a disposition code for the old revision.
Review Cadence	Monthly	Finance and Supply Chain must review the reserve balance every month.