Shortages to an inventory glut at the drop of a proverbial dime would be comical if it weren’t so serious. Across most industries, this played out similarly—but in the electronics industry, it was more than the inconvenience of insufficient toilet paper. Knees jerked, and companies raced to get those huge orders in months, or even years, ahead of time to supply their customers.
In a mere three years, however, we’re seeing the result of crazy ordering—a gazillion pieces of excess semiconductor and component inventory—many obsolete, sit while demand grinds to a halt. They’re being sold at blue-light specials or, when possible, returned to suppliers to get them out of warehouses and off balance sheets. According to a 2023 Kearney study, excess inventory is a whopping $250+ billion problem in the U.S., while on a global scale, it amounts to trillions of dollars. Across the whole value chain, everyone has a role in preventing this kind of waste. What are the chances we can avoid this in the future?
The scenario has played out before in 2001 and 2009. A key issue is with the original order. Demand, especially the realistic variety, is never entirely predictable. All manufacturers must collaborate with their customers to understand realistic demand.
When nearing unsustainable inventory levels, companies apply “Inventory Momentum,” a forward-looking metric based on the classic momentum equation: current inventory x rate of inventory change. A large inventory isn’t a problem. But when the inventory rate increases, the combined momentum is.
The solution involves five key actions:
- Reduce incoming materials
- Establish more accurate planning parameters
- Dispose of excess and obsolete inventory
- Collaborate with customers
- Prioritize revenue for customers
This allows for a reduction in total inventory in just a few weeks and reduced inventory momentum.
Every demand spike will eventually end in an inventory glut. The growing use of AI will be a major opportunity for high-tech manufacturers — and a chance to build a healthy ecosystem.