When You Gotta Take Stock

Exchanges can cut costs, but planning is still key

Like death, taxes, and sniping between Democrats and Republicans, excess inventory is one of the sure things in life. Even the most efficient manufacturers, at one time or another, find themselves stuck with too much finished product, raw materials or production equipment on hand.

Tim Wheeler, director of e-business at automotive parts manufacturer Federal-Mogul Corp., in Southfield, Mich., knows this all too well. Until recently, Wheeler and his colleagues at the $6.5 billion company had been sitting on—and spending $2,000 per month to store—$300,000 worth of surplus metalworking machinery "for many, many years," he said. "Wed given up on ever finding somebody to buy it."

So, when excess-inventory e-marketplace TradeOut Inc., in Valhalla, N.Y., approached him this summer to pitch its global online network of metalworking machinery buyers and to pledge to help him move that unwanted inventory, Wheeler had his doubts that it would work. But using the TradeOut e-marketplace proved more fruitful for Federal-Mogul than officials expected.

"There were no guarantees, but we ended up selling 60 percent" of the unwanted inventory in 15 days, garnering $150,000, or 125 percent of Federal-Moguls asking price for the equipment, Wheeler said. Now the company is planning later this month to use TradeOut again to sell another $500,000 worth of excess manufacturing equipment.

Federal-Mogul is one of many manufacturing enterprises turning to a growing number of business-to-business sites springing up to hook up buyers and sellers of excess inventory. Experts estimate that by 2004, 34 percent of excess consumer goods will be sold online. Such sites offer users a way to dispose of unwanted materials quickly, often at a higher price than they could find elsewhere. And many offer value-added services such as screening buyers and guaranteeing transactions.

But, as good as all that sounds, experts caution enterprises against relying too heavily on the new excess-inventory B2B sites. It would be a mistake to think of such sites as substitutes for doing the hard work it takes to keep unwanted inventory to a minimum in the first place.

"Production planning and demand chain optimization are still critically important" for manufacturers, said Andrew Ari Clibanoff, an analyst at Jupiter Research, a unit of Jupiter Media Metrix Inc., in New York.

Sold to the highest bidder

right now, according to amr research Inc., in Boston, there are 18 excess-inventory e-marketplaces. Most allow users to post and bid on items in auctions or reverse auctions, and most make their profits from transaction fees, which usually range from 2 percent to 10 percent of the value of the goods sold. In addition, a few charge a onetime or yearly membership fee, which can range from $120 to $250. The focus for many is the consumer retail industry. Others target electronics, automotive parts, food services and raw materials producers.

Officials at an Indiana department store chain said using one of the consumer retail goods excess-inventory exchanges, Liquidation.com Inc., in Washington, recently helped the company recover almost 80 percent of its initial investment on overstocked Christmas inventory. The president of the two-store chain, which did $5.5 million in sales last year, requested that eWeek not publish his name or the name of the chain (because, the executive said, it would give an advantage to his competitors to know what kinds of items his stores are overloaded with).

Two weeks after signing up with Liquidation.com in August, the company sold 5,000 pounds of 2-year-old Christmas goods with a retail value of $294,000 to a buyer who paid $40,000, the executive said.

If he hadnt gone to the Web to sell those items, the store president said, he would have been forced to scour "close-out magazines" to find buyers who, in all probability, would have offered him 5 cents on the dollar. In addition to cutting his financial losses, he was able to move the goods quickly and with third-party assurance that the buyer could actually pay for the goods, he said.

"I got the money upfront, and Liquidation.com checked out the buyer for me. Offline, I wouldnt have had that extra check," he said. The executive described Liquidation.coms 10 percent transaction fee as "well worth it."

Buying in

online buyers of excess inventory say the e-marketplace offers them cost and efficiency advantages as well. Cynthia Broockman, president of The White Elephant Inc., a chain of four retail stores in Warrenton, Va., signed up with TradeOut late last year. Broockman is now such a believer that she buys a quarter of her yearly inventory—about $250,000 worth of goods—on the e-marketplace.

The site not only saves Broockman money, it fits her companys strategy. To make White Elephant stores competitive with larger rivals such as Kmart and Wal-Mart stores, she said she has to offer not just personalized service but also a variety of specialized goods that the megastores dont offer.

So far, its paying off: Broockman said the companys profit margins have gone up by a full 75 percent since it started buying inventory from TradeOut. Making it an even better deal for Broockman, TradeOut doesnt charge buyers of overstocked goods transaction fees.

Buying from the excess-inventory e-marketplace has also helped White Elephant smooth its purchasing processes by buying in larger lots. "Now I buy by the truckload instead of in lots of little FedEx boxes," Broockman said.

Still, Broockman, Federal-Moguls Wheeler and the department store executive all advised companies not to rely solely on excess-inventory e-marketplaces as an overstock disposition strategy. The most cost-effective approach is still to minimize unwanted inventory. Federal-Mogul, for example, continues to work on improving demand forecasts and on finding alternative uses for excess inventory. Recently, the company developed an internal e-marketplace for moving surplus assets within different units of the company, Wheeler said.

While e-marketplaces such as TradeOut wont make overstocked inventory any less inevitable or any more desirable, they are helping to make it somewhat more manageable, according to Wheeler.

"Anything we can sell right now will seem like gravy," he said.