4.3 E&O Prevention & Disposition Rules

Excess and Obsolete (E&O) inventory is financial cancer. It occupies warehouse space, consumes working capital, and eventually requires a write-down that destroys net profit. E&O is rarely a surprise; it is the mathematical result of poor synchronization between the Demand Signal (Forecast) and the Supply Execution (Purchasing).

We treat E&O management not as "cleanup," but as a standard continuous control loop.

Prevention Logic (The Firewall)

The best way to manage E&O is to refuse to create it. We apply strict filters at the purchasing stage to block "toxic" inventory from entering the ERP.

Logic Gate 1: The MOQ Trap

• Scenario: Customer orders 500 units. Component MOQ (Minimum Order Quantity) is 5,000.
• Action: Stop PO.
• Resolution: Customer must approve the cost of the 4,500 excess units before the PO is placed.
• Output: Signed "MOQ Liability Authorization."

Logic Gate 2: The ECO Filter

• Scenario: Engineering releases a new BOM (Rev B).
• Action: Purchasing immediately halts all orders for Rev A unique parts.
• Resolution: Perform "Where-Used" analysis. If Rev A parts cannot be used elsewhere, they are flagged as "Stranded" immediately.

Logic Gate 3: The NCNR Check

• Scenario: Buying custom silicon with a 20-week lead time.
• Action: Verify Forecast Zone 1 & 2 covers the purchase quantity.
• Resolution: If Forecast < Purchase Qty, obtain written NCNR (Non-Cancellable Non-Returnable) acknowledgement.

The E&O Trigger Matrix

We classify inventory health into four distinct states based on "Days of Supply" (DoS). Do not rely on "gut feel"; use the math.

Status	Definition	Trigger / Threshold	Action
Active	Healthy stock rotating with demand.	≤ 90 Days Supply	Standard MRP planning.
Slow Moving	Demand exists, but velocity has slowed.	91 – 180 Days Supply	Stop Buys. Flag for "Burn Down" plan.
Excess	Good parts, but quantity exceeds 12-month forecast.	Inventory > 12 Month Forecast	Notify Customer. Request liability acknowledgement.
Obsolete	Part removed from BOM or EOL; Zero demand.	0 Forecast; 0 Usage in 6 mo.	Disposition. Initiate scrap or ship-to-customer.

Pro-Tip: "Just in Case" inventory is often disguised as "Strategic Buffer." If the customer wants a buffer, they must pay for the holding cost. If they won't pay, it's not strategic; it's E&O.

The Disposition Workflow

When inventory triggers the "Obsolete" or "Excess" state, execute this workflow immediately. Delaying disposition only increases the carrying cost.

Step 1: The Quarterly Audit (Detection)

• Frequency: Every 90 days (aligned with QBR).
• Output: Report listing all items > 180 days age with value > $100.

Step 2: The Notification (Commercial)

• Send the E&O Liability Report to the customer.
• SLA: Customer has 10 business days to review and dispute.
• Default: Silence = Acceptance of liability.

Step 3: The Decision (Disposition)

Select one of the four paths below.

Option A: Ship to Customer

• Action: Physically ship the parts to the customer’s facility.
• Cost: Customer pays freight + value of material.
• Best For: High-value custom parts (e.g., Enclosures, PCBs) that the customer might use elsewhere.

Option B: Buy-Back / Return

• Action: Return to the original distributor/vendor.
• Cost: Restocking fee (typically 15% – 25%). Customer pays the fee.
• Best For: Standard commodities (ICs, Passives) within 1 year of purchase.

Option C: Fire Sale (Broker)

• Action: Sell to an independent broker.
• Cost: Recovery is typically 5% – 10% of book value. Customer pays the remaining delta.
• Best For: Generic silicon where market demand exists.

Option D: Scrap (Certificate of Destruction)

• Action: Physical destruction of the material.
• Cost: Customer pays book value. Factory absorbs disposal cost.
• Best For: Custom PCBs, proprietary IP, or hazardous materials.

Financial Controls & Approvals

Writing off inventory impacts the P&L (Profit & Loss). Strict authority levels are required to prevent fraud or unauthorized margin erosion.

Write-Off Authority Matrix:

Value of E&O	Approver Required
< $1,000	Project Manager
$1,000 – $10,000	Operations Manager
$10,000 – $50,000	Plant Director
> $50,000	VP Finance / CFO

The "COD" Rule:

Never remove assets from the balance sheet without a Certificate of Destruction (COD).

• The COD must include: Part Number, Quantity, Date, Method of Destruction, and Photo Evidence.
• Without a COD, the write-off is an audit risk.

Final Checklist

Control Point	Passing Criteria	State
ERP Ageing Report	Automated report runs weekly, filtering stock > 180 days.	Active
Liability Clause	Contract specifies customer pays for custom material obsolescence.	Signed
Scrap Vendor	Certified e-waste disposal partner identified (ISO 14001).	Active
Last Time Buy (LTB)	Process exists to catch Vendor EOL notices before parts go obsolete.	Defined
E&O Invoice	Accounting has a specific code for billing E&O liability.	Defined