Chasing Away the Excess-Inventory Blues

Online auctions can help streamline the process of getting cash for returned or unsold products, supply-chain executives say.

The day after Christmas is still weeks away, but that’s close enough for finance and supply-chain executives to start worrying about merchandise returns and excess inventory. How will they get the best value for the unwanted goods?

One answer is to auction them off. By posting returned or overstocked items of interest to consumers (video games, baby clothing, televisions) or other businesses (computer parts, pallets of manufactured items) on an online auction, sellers can gain access to many more potential buyers than they would if they simply went straight to liquidators.

Further, auctions can help streamline the process of getting cash for returned, unsold, or excess products, supply-chain executives say. That process can be cumbersome and haphazard, as it used to be at SanDisk, a maker of memory storage cards used in consumer electronics products. That was before the company started to sell excess inventory via auction about two years ago, according to Doug Lampson, director of corporate financial planning and analysis at the company.

Previously, SanDisk executives would simply ask sales reps to “make some phone calls” to brokers if the pile of unsold items grew too high, says Lampson. That resulted in just one or two potential bidders per item or group of items (and tied up the sales reps’ time). Now, since setting up a regular arrangement with FreeFlow, a logistics and supply-chain company that provides auctions for consumer electronics companies, SanDisk typically has eight vetted bidders for a set of items.

Perhaps more important, the arrangement has turned a scattershot process into a swift and regular routine. Each month SanDisk identifies slow-selling or obsolete products, draws up a pricing proposal, and then puts the products up for bid. Given the volatile nature of the semiconductor storage business, where prices are known to drop as much as 20% in a month, “we try to move product very quickly,” says Lampson.

Of course, surplus goods can be a problem for any company, given the inherent difficulty of forecasting. “There is a level of inaccuracy in the forecasting process, which tends to mean that we have some level of excess inventory,” says David Warrick, general manager for Microsoft’s entertainment and devices operations in Europe, the Middle East, and the Asia/Pacific region, which also has an arrangement with FreeFlow. “And what we continually try to do is keep that to a minimum and make sure it flows as well through the supply chain.”

As a way of controlling their bidding audiences, companies with big sales staffs like Microsoft can auction off excess inventory in two stages. First, they can hold internally focused auctions, putting items up only for their sales staffs to see and offer to their clients. Then, if all the items aren’t sold that way, the auctioneer might provide a private, preselected set of bidders for the remaining goods.

Why would a company want to narrow the bidding audience? One reason might be that doing so could set a high bar among its potential creditors, by admitting only those buyers likely to pay their debts. Companies may also want to control the timing of the liquidation of their products, according to Alan Scroope, founder and chief executive officer of FreeFlow.

For example, a finance chief of a company selling its returned goods via a public auction might be irked to find that an individual or small firm has bought a batch of the products online and is undercutting the price at which the company’s favored retailers are selling it, says Scroope. That represents a risk to the brand that the CFO might not be willing to tolerate.

Such narrowly focused, niche-oriented auctions are not for every company with excess inventory, however. Wholesale bidders on such sites tend to require detailed grading of the products — and high-quality products at that.

And a company with products that have been handled roughly at Christmas before they’ve been returned might do better holding an auction elsewhere. “We handle broken and cracked consumer electronics,” says Bob Auray, chief executive of GENCO Marketplace, a logistics company that sells some goods through FreeFlow but auctions off a much broader array of excess inventory itself. “We find that parts-oriented scavengers may be best for that type of product.”

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