Non-Moving Inventories: The Supply Chain’s Elephant in the Room

The phrase, “elephant in the room,” is said to have originated from a fable by Ivan Krylov that tells about “a man who goes to a museum and notices all sorts of tiny things, but fails to notice an elephant.”  It has become a favourite expression for an obvious problem or issue that for some reason gets muddled, forgotten, or avoided. 

Just about every supply chain has an elephant in its room and in many cases, it’s called non-moving inventory. 

Non-moving inventories are items that have ended up idle in storage or on the factory floor for extended periods of time.  Non-moving inventories can be raw materials, packaging materials, spare parts, work-in-process, or finished goods.  They are merchandise that were acquired or produced at a cost but have become unattractive in value.

Non-moving inventories end up as they are for a variety of reasons: 

  1. the enterprise produced more than what could actually be sold;
  2. items are defective, rejections, damaged, or were returned from customers;
  3. items are old, obsolete, expired, or discontinued;

Whatever the reason, enterprise executives would see them as one thing:  a nuisance that takes up valuable space and ties up working capital.   

But they are more than a nuisance.    Non-moving inventories are cash investments that went to naught, as they had lost their selling value.  They are blots to marketers who see them not only as visible failures of their promotional strategies but also as barriers to introducing new products. Some enterprises hold their marketing and sales executives accountable for non-moving inventories and would insist they lead in running them out before any new product is introduced. 

Non-moving inventories are potential threats.  When non-moving inventories grow in size or quantity, they not only become the elephants in the stock-room or storage facility, they also become risks.  An extreme example is when non-moving ammonium nitrate fertiliser exploded in a Beirut, Lebanon warehouse in 2020:  https://www.theguardian.com/world/2020/aug/04/huge-explosion-beirut-lebanon-shatters-windows-rocks-buildings 

The good news is many non-moving inventories don’t end up exploding.  The bad news is that even if they don’t explode, they are a potential threat to the enterprise’s balance sheet and to its future growth. 

Despite their nuisance and threat, many enterprises take for granted non-moving inventories and instead try to get them away from their sight. 

A case in point: a large corporation that makes steel beams and heavy metal parts hired a chief information officer (CIO) to streamline the inventory system.  To appreciate the company’s products and materials, the new CIO toured the corporation’s main factory and warehouse which was just outside the city.  He noticed a huge pile of rusting steel products at a far side of the facility and asked what they were.  The plant manager who was his tour guide said the items were scrap. 

The CIO asked how come there’s so much of the “scrap?”

The plant manager said, “I don’t know. They’ve been sitting there for years ever since I was hired.”

When the CIO reported the “scrap” to the Chief Executive Officer, the latter was outraged. 

“They [his chief finance officer & chief manufacturing officer] told me that they got rid of that stuff many years ago!”, the CEO exclaimed. 

The CEO summoned the CFO and Chief Manufacturing Officer (CMfgO) and ordered a thorough audit. 

The CFO and CMfgO were furious at the new CIO for making them look bad for exposing the hidden inventories.  Within a few weeks, they drove the CIO to resign after they constantly hurled negative comments about him and refused to cooperate with him in improving the inventory system. 

As for the non-moving inventories, they continued to sit in that far corner of the company’s factory, where executives once again forgot about them.

For the steel company, the non-moving inventories would come back to haunt the executives.  This is especially true as the non-moving items would multiply in size and take up more space.  It would become a problem when the enterprise entered hard times and had difficulty paying debts.  Auditors would no doubt point to the non-moving inventories as where the company’s cash is tied up. 

How then does one get rid of non-moving inventories?  The answers are straightforward but can be controversial: 

  • Sell Them Even at a Loss

Sell non-moving inventories at the best but most attractive price possible.  If one can only sell them at scrap value, so be it. 

Some finance executives, however, caution against such drastic selling.  It’s one thing to convert non-moving inventories to cash; it’s another to sell them very cheaply.  Losses in balance sheets attract negative attention especially if an enterprise is publicly listed.  But if one wants to once and for all remove the elephant in the room, this is usually the number one solution, whatever the hit it will bring to an enterprise’s financial reputation. 

  • Throw Them Away

This is worse than selling at scrap value but sometimes it’s the next best option if the enterprise needs valuable space and the alternative is to pay dearly for more space. 

Throwing stuff away can also be a hassle given all the compliance protocols it might entail (e.g. environmental impact). But if the items are toxic or dangerous to carry for extended periods of time, the enterprise might not have much of a choice.

  • Salvage Whatever Can Be Recycled or Reused

Some enterprises would invest in salvaging what can be reusable or re-saleable from non-moving inventories.  It’s never an attractive option as it will often require significant expense in time, materials, and equipment.  But it can be a compromise in that salvaging non-moving stock may not result in a sudden hit to an enterprise’s accounting books.  It would also be an opportunity for enterprises to dispose items gradually while getting something back in return. 

  • Process the Work-In-Process (WIP)

Many manufacturing enterprises have work-in-process inventories (WIP).  They’re the stuff that lie between production operations, usually waiting their turn for the next step in a manufacturing process. 

Some manufacturers, however, keep their WIP waiting too long, sometimes too long that the WIP loses value from deterioration and expiration.  This happens when manufacturers don’t follow first-in first-out (FIFO), customers cancel orders while items are in production, or managers allow other orders to “jump the line” or move other WIP ahead of others. 

I’ve seen WIP stored in one place for more than three (3) years, hidden away in a dark corner of a factory, their values long written off by auditors who thought they were losses. 

Even if written off, WIP takes up space and represent poor management resulting in waste.  And even as operations managers may succeed in hiding and getting rid of them, poor manufacturing practices will undoubtedly result in more WIP time to time. 

The answer to avoiding non-moving WIP is to process them right away.  If they are no longer needed, then either the manufacturing manager should process them anyway, scrap them, or salvage some value from them.  Manufacturing managers should also have a policy to always process all the WIP within a maximum number of days, if not hours. 

The best way to get rid of non-moving inventories is to avoid having them in the first place.  Unfortunately, many enterprises are stuck with them, in one form or another.  Eventually, non-moving inventories become easy to spot as an elephant in a room would be.  They’d be that pile of junk, that stack of unidentified boxes, that pallet of dusty cartons, those drums behind the building, or that huge tank that managers have no idea what it contains. 

Any non-moving inventory will stick out like a sore thumb.  We may try to ignore them but they’ll grow into something larger and harder to afford if we let them. 

Let’s not let them.  Enterprises should get rid of them as fast as possible.  Teamwork with financial auditors and accountants would help because when one has to remove an elephant, one needs all the help one can get.    

About Overtimers Anonymous

Competitive & Non-Competitive Priorities and How to Deal with Them

In several firms I’ve worked with, I couldn’t help but notice that supply chain managers would sometimes be engrossed with priorities regarding compliance to government-mandated occupational safety & health standards.  They would have long meetings and spend much time on the nitty-gritties of reports to be filed and procedures to follow.

But in the following week, the same managers would switch to issues regarding costs that were going over budget.  The general manager of their company was concerned about expenses and wanted a meeting so the supply chain managers would be rushing to prepare their presentations to explain their respective functions’ spending. 

Priorities would shift week after week, month after month.  One day it would be safety, the next day it would be quality.  When managers would ask which priority is more important, their boss would reply: “all of them.” 

There are two (2) types of priorities enterprise executives deal with.  These are competitive priorities[i] and non-competitive priorities. 

Competitive priorities are those when addressed add value to the enterprise.  Examples are sales, cost, quality, delivery reliability, and after-sales service excellence.  As the term suggests, these priorities directly contribute to an enterprise’s competitive advantage. 

Non-competitive priorities are those that executives do not recognise as adding value to the organisation but are too important to ignore.  Examples are safety, security, industrial labour relations, community relations, government regulation compliance, environmental safeguards, and employee health.  These priorities may not contribute to an enterprise’s competitive advantage but are imperative to its ongoing operations. 

Enterprise executives see competitive priorities as vital to the organisation’s growth.  Consumer goods executives, for example, would develop marketing and product initiatives to bring about higher sales. 

Enterprise executives, on the other hand, see non-competitive priorities as crucial to the organisation’s survival.  Executives, for example, would stress industrial safety as a program to prevent injuries.  They would expect their organisations to adopt safety practices so that people don’t get hurt, and not lead to disruption in operations. 

To put it in another way:

  • Competitive priorities address opportunities.
  • Non-competitive priorities address adversities.

Classifying priorities in either category may help enterprise executives not only what to tackle first but also determine who should be leading the respective priorities. 

Quality and safety are everyone’s jobs but if there are no quality control or safety managers to lead priorities in either one, then it would probably be chaotic for the executives trying to handle them on top of the other important things they have to do. 

It also pays to have awareness of the two types of priorities to know how they would affect the enterprise.  Classifying community relations as a non-competitive priority, for instance, may prove worthwhile for an enterprise who has a factory situated within a largely populated city.  It would encourage executives to invest in a manager who would engage with the factory’s neighbours and handle issues that might result in mutual benefits. 

Being mindful of competitive and non-competitive priorities also gives the organisation a constant big picture of the work it’s doing.  Engineers building a new storage facility, for example, would best have an understanding of what they want to accomplish.  It wouldn’t just be about building for more capacity; it would also be about the impact on working capital, better distribution of products, reduction in damages, and safer working conditions.

Executives can sharpen their enterprise strategies with their awareness of both competitive and non-competitive priorities.  The trick is to have balance and brevity.  Some company mission statements tend to stress too much on quality and leave out the rest.  Other corporate philosophies overdo it with numerous paragraphs that overwhelm the organisation. 

We all have priorities.  We just need to understand which ones are competitive and non-competitive in which the former addresses opportunities while the other takes on adversities.  Both are too important to ignore so it would help if we classify the things we do as either competitive or non-competitive. 

If we can’t do things all at once, we may need to check our structure and resources.  We also should try to make sure our overall strategies aren’t complicated or overwhelming for our own organisations. 


[i] Davis, Mark M., Aquilano, Nicholas J., and Chase, Richard B., Fundamentals of Operations Management, 1999, Chapter 2, p. 25

About Overtimers Anonymous

The World Needs Supply Chain Engineers

Not leaders.  Not managers.  Not business executives.  We have plenty of leaders, both real and wannabes.  Managers and executives too; we have enough. 

We need supply chain engineers. 

The global supply chain is a present-day 21st-century reality.  We get much of our goods from all over the world.  We buy shoes from Europe to sell in America.  We ship rice to Australia and import minerals in return.  We travel to trade and we negotiate with our tablets and mobile phones. 

E-commerce has expanded the reach of supply chains.  We order and pay via the Internet.  More and more enterprises deliver door-to-door, business-to-business, person-to-person.  Transportation’s new normal is multi-modal: airplane-to-van, van-to-vessel, vessel-to-truck, truck-to-motorcycle.  Ordinary people ferry food and merchandise to homes as much as courier companies deliver packages to businesses. 

There is so much room for improvement that supply chain management has become a high-profile career choice.  But this is not a promotional message for supply chain management; this is a call for action.  Supply chains are facing challenging adversities and supply chain management, as is, is no longer capable to deal with them. 

Supply chain engineering is the “application of scientific and mathematical principles” for the design and synchronization of highly complex supply chain operations.  It is a field the world needs to synchronize supply chain operations and networks.    

It’s not only because supply chains have so much room for improvement.  It’s also because adversities have become too significant to ignore.  The adversities, which some may classify as supply chain risks, are real. 

Adversities in recent years have caused plenty of pain to supply chains.  They’ve disrupted transport, caused shortages of critical raw materials, and brought widespread inefficiencies.  As much as they’ve been manageable, the adversities are not getting any fewer.  In fact, they’re getting more disruptive and threatening.  To an extent, they can shut down supply chains and cause not only economic failure but also society chaos.  The most prominent example of this is the COVID19 virus pandemic. 

Just as we need doctors to deal with disease, we need engineers to deal with supply chain disruption.  Management as a profession and talent is no longer enough because management is only about planning, organising, directing, and controlling.  We need engineering, that is, we need to have people with skills to design and install systems, networks, and methods to synchronize and integrate the various supply chain operations and make them adversity-resistant. 

We need problem solvers that can define problems before they happen.  Anticipating adversity and mitigating it, if not overcoming it, are the key tasks of the supply chain engineer. 

Where can we find supply chain engineers? 

They’re closer than you think

Where are the Supply Chain Experts?

Supply chain managers are noticeably invisible amid the COVID-19 crisis.

There have been no supply chain executives standing beside national leaders as they made speeches and announcements.

There have been rarely any interviews with supply chain experts about how to deal with shortages of food and difficulties in transportation.  If there were, much of whatever was said had been largely ignored.  

A lot of people have viewed the coronavirus disease, COVID-19, as a medical problem requiring a medical solution, i.e., hospitalization, quarantine, finding a cure.  As much as it is a medical issue, it is more of a problem that needs a social solution. Such a solution needs four (4) things:

  1. convincing everyone to re-align their lifestyles to that of good hygiene, sanitation, avoidance of unnecessary travel & physical contact, and healthy living;
  2. rapid segregation and isolation of suspected infected individuals;
  3. boosting capacities of facilities and mobilization of medical personnel;
  4. synchronising supply chains to stockpile and deliver inventories of essential items such as medical equipment, parts, supplies, food, water, fuel, and other essential goods.

Many countries did the first two, (a) & (b), many are scrambling with difficulty to do (c), and as for (d), it has been a nightmare of shortages and desperation. 

Supply chains are overwhelmed amid the COVID-19 pandemic.  Business firms and organisations are fending for themselves.  There is no united front, no coalitions formed.  There is no high-profile leadership to rally the logistics and manufacturing industries.  Countries aren’t cooperating with each other; how could one therefore expect enterprises to do the same? 

Despite the strides in bringing supply chain talent to corporate board rooms, many executives both in business and government have not engaged the supply chain professionals in the fight versus COVID-19.  Instead, the supply chain experts are relegated to the side-lines, sweating away somewhere untying bottlenecks and moving merchandise as fast as they can to where they are needed the most.   

Many enterprises only see supply chains as networks working within the boundaries of their respective businesses and not as continuous lines of flow of materials and merchandise that cross from one enterprise to another as they accumulate in value from one point to the next: from mines & farms, to factories & warehouses, to stores & e-commerce cross-docks, and finally to users & consumers. 

As much as executives may justify confining supply chain management within imaginary boundaries as a means to foster their respective enterprises’ competitive advantages, there is great potential in designing supply chain systems and networks that synchronise the streams of products, information, and capital from the sources to customer’s shelves. 

This is made more apparent with supply chains becoming more vulnerable to adversities such as COVID-19. 

Adversities are those that disrupt the routines and flows of operations, particularly supply chains.  Adversities come in different forms, degrees, shapes, and sizes.  They are never the same from one to the next (similar, maybe, like with typhoons but different in that typhoons never follow the exact same path with the exact same intensity of wind & rain).

Because supply chains have stretched themselves to the four corners of the world, they have become more susceptible to varying adversities.  Global supply chains are spread thin; their links ever more sensitive to disruption and change.

As supply chains have become global, supply chain management, however, has remained local.  As mentioned, enterprise owners are reluctant to collaborate and link with vendors and customers for fear of compromising their competitive positions.  Hence, there’s no overall organized effort to synchronize because there’s no strategy or structure for such in the first place. 

The COVID-19 pandemic has shown that supply chains can’t function productively without synchronisation.  And it has also shown that societies suffer when supply chains become adversely unproductive. 

How do we synchronise supply chains to make them if not keep them productive? 

The answer is not in management.  It’s in engineering

We Need a Playbook and It’s the Last Thing We Need

Many enterprises and countries around the world have playbooks to deal with pandemics such as COVID-19.  These range from ISO standards and those based on the United States’ Occupational Safety & Health Administration (OSHA), Center of Disease Control & Prevention, and even the US Army Medical Research Institute of Infectious Diseases (USARMIID).   

But as much as present-day playbooks may have protocols for pandemics, they don’t have any for supply chains.  Enterprises and governments may have response plans such as quarantines and allocations of resources for medical facilities & personnel; there wouldn’t be any, however, for cross-border supply chains.

Why is that?  Because global supply chains have become prominent only in recent years.  Governments and many enterprises still manage supply chains as if they exist only within their borders and factories. 

Global supply chain relationships are mostly in the form of contracts with vendors and 3rd party providers.  Most of the links, from the sources, to the transportation, to the storage & deliveries are siloed, that is, they’re autonomous and overseen separately.  Collaborations and interactions are mostly done between individual representatives such as between sales agents and purchasing personnel. 

With no real connection, there is no protocol, and therefore no synchronisation that can overcome widespread disruptions from adversities such as what has happened from COVID-19.  Every link on the supply chain is actually vulnerable to whatever form of adversity, more so a global pandemic.

If enterprises can synchronise (some people call it integrate) their supply chains, then there would be a united front versus any adversities.  Enterprises would be able to adapt together.  Goods would keep moving.  People will get their products.  Economies would remain stable.    

Playbook protocols and procedures, however, are the last thing supply chains need.  Synchronising supply chains requires several things first: 

  1. Management commitment;
  2. Establishing comprehensive policies and strategies;
  3. Setting objectives and performance measures;
  4. Designing structures and systems to support the strategy;

Many enterprises have embraced (1), (2), and (3).  Many have not been fully successful with (4).  This is because many enterprises have trouble finding the talent to do (4). 

Doing (4) is an engineering effort.  It requires talent that will be sought for because before enterprises can sync their supply chains, they’ll need to engineer their networks to establish the links. 

Only then can enterprises rewrite their playbooks and prepare for the next pandemic and whatever adversity that comes their way.