The Excess & Obsolete Iceberg Explained

When it comes to metaphors, icebergs are nothing new.

An iceberg typically depicts a visible tip above water (symbolising the “tip of the iceberg”), while its submerged layers represent hidden or lesser-known information.

In the example below, our mascot, Chip, is standing on the excess and obsolete (E&O) iceberg. E&O inventory consists of electronic components that are surplus to production requirements. This stock ties up capital and warehouse space, reducing flexibility in production and limiting room for high-value inventory.

Many companies are only aware of a small percentage of their true surplus problem, putting them at financial risk. While it is important to note that electronic manufacturers may use different timescales and classifications for excess stock, this blog uses the average data that we see at Component Sense.

Let us dive into what the E&O iceberg means!

Obsolete stock: the tip of the iceberg

Classification: No movement or use in over two years and no plans for future use

Nearly all electronic manufacturers understand the risks of holding obsolete inventory. In many cases, obsolete parts have been surplus to demand for a long time and have reached the end of their perceived lifespan, often carrying an old date code.

However, obsolete components still have use and demand, even if they rely on outdated technology. Legacy components (parts older than ten years) are often required for repairs of older machinery and are unavailable through direct channels. For example, these components can facilitate essential repairs in the military and agricultural sectors.

Generally, electronic manufacturers hold 10% of their overall revenue in surplus electronic components (the whole iceberg), with dead or obsolete electronic components typically accounting for just 1% of this (the tip of the iceberg).

Very slow-moving stock: hidden beneath the surface

Classification: No movement or planned use within 18–24 months

Say you have 100,000 pieces of a component in stock but only use 50,000. The remaining balance is generally classified as very slow-moving, slow-moving, or active excess.

Very slow-moving excess stock has been sitting unused for a year and a half to two years. Despite this, inventory managers may still hold out hope that all the parts will eventually be needed, which presents financial risks.

While very slow-moving stock tends to generate a higher return than obsolete components when redistributed on the secondary market, it can still yield a lower return than the original cost price. This is because procurement professionals assume that parts of this date code are just ‘tomorrow’s obsolete.’ However, the stock value ultimately depends on current demand, market conditions, and how the part is marketed.

Slow-moving stock: the middle ground

Classification: No movement or use in 6–18 months

Many manufacturers aim to hold no more than six weeks of stock, but unfortunately, this does not always happen. It is not uncommon for some companies to hold up to two years’ worth of stock. In fact, following the COVID-19 pandemic, we saw some electronic manufacturers holding up to ten years’ worth of inventory due to the chip shortages at the time. Much of this inventory is now classified as obsolete, very slow-moving, or slow-moving.

Manufacturers sometimes do not classify slow-moving inventory as excess; however, it should be treated as such and redistributed. The likelihood of stock actually being used is slim, and electronic components are a quickly depreciating asset. 

There is generally good demand for slow-moving excess, as the date code is more likely to be enticing for procurers. However, in some cases, slow-moving excess may still have alternatives available through direct franchised channels, which could impact the sellable price. Listing slow-moving stock early on the secondary market maximises returns.

Active excess: the hidden opportunity

Classification: Just been, or soon to be, labelled as surplus to immediate requirements

Manufacturers often overlook active excess, meaning they miss a key opportunity to maximise returns through redistribution. These components are newly classified as surplus to production requirements, though some may still be in production and nearing phase-out. The part could even still be in use for the foreseeable future, but due to over-forecasting, there is now too much stock.

As active excess parts are usually relatively new and made with the latest technology, there is likely to be high demand and a greater chance of recovering the cost price through redistribution. The best time to sell your surplus inventory is at the active excess stage. 

Active excess, the bottom of the iceberg, is out of view for many, given conservative inventory strategies that often leave companies financially worse off in the long run. Consider the cost of storage, stock takes, insurance, and eventual disposal fees, all of which can be avoided by getting on top of excess early.

Automotive manufacturers, for example, often prefer not to store excess inventory. Their just-in-time inventory strategy ensures that stock arrives and is used on the same day in many instances. Operating like this has many benefits. For example, if forecasts take a hit, manufacturers are not left holding large amounts of active excess that suddenly become obsolete or very slow-moving.

Below is an example of the value of a one-billion-dollar manufacturing site's overall E&O inventory (10% of annual revenue).

Get on top of E&O before it sinks profits

On average, manufacturers are sitting on surplus inventory equivalent to 10% of their overall revenue. Unfortunately, the top of the E&O iceberg, obsolete parts (1%), is all that inventory managers focus on. However, this is a missed opportunity. 

Considering and redistributing very slow-moving, slow-moving, and active excess (the remaining 9%) maximises returns and avoids unnecessary costs for storing parts that will likely never be used.

Component Sense’s InPlant™ solution is the most profitable way to redistribute excess. It identifies surplus early (active excess) and lists it while it retains peak market value. More often than not, InPlant™ leads to a 100% recovery of the cost price, or even a profit. 

Discover InPlant™ today by clicking the button below!