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).

E&O management is treated 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. Strict filters are applied at the purchasing stage to block “toxic” inventory from entering the ERP.

Prevention filter 1: the MOQ trap

Situation: A customer order quantity is significantly lower than a specific component’s MOQ (Minimum Order Quantity).
Action: Halt the PO process.
Resolution: The customer must approve the financial liability for the excess units prior to the factory placing the component PO.
Output: A signed “MOQ Liability Authorization” document.

Prevention filter 2: the ECO filter

Situation: Engineering releases a new BOM revision.
Action: Purchasing immediately halts all active orders for unique parts tied exclusively to the previous revision.
Resolution: Perform a “Where-Used” analysis. Parts that cannot be utilized in other assemblies must be flagged as “Stranded” inventory immediately to make the commercial impact visible.

Prevention filter 3: the NCNR check

Situation: The factory needs to procure custom components with extended lead times.
Action: Verify that Forecast Zone 1 & 2 volumes cover the intended purchase quantity.
Resolution: Forecasts falling short of the Purchase Quantity require a written NCNR (Non-Cancellable Non-Returnable) acknowledgement from the customer to cover the gap.

The E&O trigger matrix

Inventory health is classified into four distinct states based on “Days of Supply” (DoS). Math must be used instead of relying on “gut feel”.

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.

The disposition workflow

When inventory triggers the “Obsolete” or “Excess” state, this workflow must be executed 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)

One of the four paths below must be selected.

Option A: Ship to Customer

Action: Ship the parts to the customer’s facility.
Cost: Customer pays shipping + 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

Assets must never be removed 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.

Recap: E&O Prevention & Disposition Rules

Parameter	Condition / Threshold	Required Action	Disposition / Outcome
MOQ Trap	Customer order < component MOQ	Halt PO. Obtain signed “MOQ Liability Authorization”.	Customer assumes financial liability for excess.
ECO Filter	New BOM revision released	Halt orders for unique parts from old revision. Flag “Stranded” inventory.	Make commercial impact visible.
NCNR Check	Purchase Qty > Forecast Zone 1 & 2 volume	Obtain written NCNR acknowledgement from customer.	Customer covers forecast gap liability.
Days of Supply	≤ 90 Days	Standard MRP planning.	Inventory classified as Active.
Days of Supply	91 – 180 Days	Stop Buys. Flag for “Burn Down” plan.	Inventory classified as Slow Moving.
Demand Forecast	Inventory > 12-Month Forecast	Notify Customer. Request liability acknowledgement.	Inventory classified as Excess.
BOM Usage	0 Forecast; 0 Usage in 6 months	Initiate disposition workflow (Ship, Return, Broker, Scrap).	Inventory classified as Obsolete.
Quarterly Audit	Items > 180 days age & value > $100	Generate report. Execute disposition workflow.	Customer notified via E&O Liability Report (10-day SLA).
Write-Off Value	< $1,000	Project Manager approval.	Asset removal requires Certificate of Destruction (COD).
Write-Off Value	$1,000 – $10,000	Operations Manager approval.	Asset removal requires Certificate of Destruction (COD).
Write-Off Value	$10,000 – $50,000	Plant Director approval.	Asset removal requires Certificate of Destruction (COD).
Write-Off Value	> $50,000	VP Finance / CFO approval.	Asset removal requires Certificate of Destruction (COD).