Shelf life: How to avoid losing money to expired or obsolete parts

Managing shelf life and obsolescence is a significant challenge in the automotive parts industry. Without proper strategies, distributors can face substantial financial losses due to expired or obsolete inventory. This article explores the specific product categories most prone to these issues, effective risk management strategies, and actionable advice for optimizing inventory.

Financial impact of expired or obsolete parts

Expired or obsolete parts result in direct costs such as disposal and replacement. For hazardous products with relatively short shelf lives, disposal costs can be inordinately high. Additionally, there are indirect costs like lost sales opportunities and the storage costs of keeping unsellable inventory. These financial burdens underscore the importance of effective shelf life management. If obsolete inventory finds its way to your customers, additional costs for return or customer disposal come into play as well.

Product categories prone to shelf life issues 

Batteries: Batteries have a limited shelf life due to chemical degradation. Improper storage conditions, especially extreme cold, can accelerate this process, leading to early expiration. Certain batteries may also be prone to leakage or evaporation.

Fluids (oils, coolants, brake fluids): These fluids are prone to degradation over time and exposure to environmental factors. They require proper storage conditions to maintain their efficacy. Hot and cold temperature cycles, in particular, can accelerate this degradation.

Rubber components (belts, hoses, seals): Rubber components can age and crack over time, even if unused. High humidity, high temperature, exposure to water, and particularly exposure to sunlight will all dramatically shorten the shelf life of rubber products. These products are also often subject to volatility in demand based on vehicle models and maintenance schedules.

Electronic components (sensors, control modules): Rapid technological advancements can render electronic components obsolete quickly. They have shorter product life cycles and higher risks of obsolescence. This is truer of consumer products (e.g. USB chargers) than OEM electrical components.

Filters (air, oil, fuel): Filters are affected by packaging integrity and environmental conditions, especially moisture and humidity. Despite generally higher turnover rates, they are at risk of excess stock if not managed properly. Filters, especially those made of paper, can be particularly prone to mold.

Strategies for managing shelf life and obsolescence

Effective management of shelf life and obsolescence involves proactive strategies and close collaboration with suppliers. Here are some actionable approaches:

Set lower service level targets: For items with shelf life or obsolescence risk, set lower service level targets relative to other items with similar sales volume. This helps mitigate the risk of excess stock aging into expiration before it can sell. Regularly review and adjust these targets based on market demand and inventory performance.
FIFO fulfillment: Ensure that the oldest product is always picked first. If lot tracking is not being used, basic rules (e.g. new product coming into stock is placed behind or above existing product) can be effective.
Dynamic pricing and promotions: Use dynamic pricing strategies to move older inventory before it becomes obsolete. This could involve discounting products nearing the end of their shelf life to encourage sales. Plan promotions and discounts specifically for items at risk of expiring. This helps clear out old stock and makes room for new inventory.
Planned, recurring, systematic stock rotation with vendors: Establish agreements with suppliers to rotate stock systematically. For instance, unsold inventory within the first 90 days can be exchanged for newer products without restocking fees. This ensures that your inventory remains fresh and minimizes the risk of obsolescence. Regularly review and update stock rotation policies to keep up with market trends and inventory performance. This collaborative approach with suppliers can significantly reduce the financial burden of obsolete inventory.

Conclusion

Managing shelf life and obsolescence is critical in the automotive parts industry. By focusing on specific product categories prone to these issues and implementing effective risk management strategies, distributors can avoid significant financial losses.

Setting lower service level targets for volatile items, establishing stock rotation agreements with suppliers, and leveraging technology for inventory management are all essential steps. By adopting these strategies, you can optimize your inventory, enhance customer satisfaction, and drive business success.

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How to improve seasonal forecast accuracy for better customer outcomes

Seasonality is a core consideration when you’re forecasting how much stock you’ll need to purchase to meet expected demand. For example, in the auto industry, the demand for batteries typically spikes in winter, while wiper blades see higher sales during rainy seasons. However, there are a number of seasonal considerations, not all related to weather, which can seriously impact the effectiveness of your forecast.

In this article, we’ll go over some key concepts:

Exploring the reliability and utility of weather forecasts in purchasing
Isolating promotional activities (e.g. Black Friday sales) from seasonal effects
Ensuring that seasonal purchasing plans take into account supplier lead time
Comparing year-over-year vs recency weighted (i.e. “momentum”) demand models

Exploring the reliability and utility of weather forecasts in purchasing

Weather is a significant factor in seasonal demand for many products. While any good forecast should account for sales changes during each season, we’ve seen some clients try to incorporate real time weather forecasts into their sales predictions. This can have utility in certain situations, but can also be more trouble than it’s worth.

Short-term accuracy

Weather forecasts are generally reliable for short-term planning (up to 10 days). For items with very short leadtimes, it may be possible to use near term weather forecasts to make adjustments to immediate inventory needs.

Long-term predictions

Long-term weather forecasts are less reliable. While patterns like El Niño can indicate general trends, they should be, at most, a small influence on your overall demand plans. The Farmer’s Almanac and other long term forecasts are notoriously unreliable.

Isolating promotional activities (e.g. black friday sales) from seasonal effects

Promotional activities can skew your seasonal forecasts if not properly accounted for. It’s crucial to isolate these effects to maintain forecast accuracy.

Historical adjustment

Adjust historical data to remove the impact of past promotions, so that your system doesn’t over-forecast coming out of a big promotion. At Hydrian, we have automated ways of doing this, but manual review of promotional sales periods is fine, too.

Future planning

Add expected promotional activities to your future forecasts to ensure adequate stock levels. This is the flipside of historic correction — if you don’t load in future increases in demand due to promotional activity, you will not have the inventory necessary to support the promotion. You might even be spending extra marketing dollars to send traffic to items that aren’t available.

Lead time cycles

For example, if your sales and marketing team doesn’t pass along estimates for promotional sales increases at least one supplier lead time cycle before the promotion starts, you will be unable to move extra inventory into your DC in time to support the promotion.

Ensuring that seasonal purchasing plans take into account supplier lead time

One critical aspect of seasonal forecasting is aligning your purchasing plans with supplier lead times. Seasonal demand spikes are predictable, but if you fail to account for the lead time required by your suppliers, you might find yourself with stockouts during peak demand periods. Order too much stock too early, however, and you’ll needlessly hold excess inventory.

Early seasonal orders

Place large seasonal buy orders roughly one lead time cycle ahead of expected demand, with a reasonable buffer.

Calculate lead time buffer

To estimate an adequate lead time buffer, you could take the 75th percentile of each supplier’s historic lead time and then add a month.

Consider holiday variances

Make sure to account for holidays and other exceptions that may change the lead time of a particular order.

Year-over-year vs recency-weighted (i.e. “momentum”) demand models

When forecasting seasonal items, it can be tempting to use the prior year’s peak demand in order to predict this year’s peak demand. For extreme seasonal items (e.g. ice scrapers, which may not sell at all during the off season) this can make good sense, especially before the high season begins. But for items with at least some sales during off-peak seasons, it’s important to incorporate that recent data into your forecast.

In any event, revising your forecast during the peak season based on actual recent sales is critical. Using a seasonally normalized model, where recent demand is first adjusted for seasonal effects before passing into your forecasting model, is usually the best approach.

Key strategies:

For extreme seasonal items, simply using last year’s sales as your baseline forecast can be a good starting point, especially before the start of the season.
For items with at least some off-peak sales, and for all items once the peak season begins, seasonally normalize historic data by dividing each past period’s sales by a “seasonal factor” (the expected sales during that period vs the annual per-period average). Run your chosen forecasting model on this data.
To “re-seasonalize” the data, multiply each forecast period’s demand in your output by that period’s seasonal factor.

Conclusion

Effective seasonal forecasting requires a nuanced approach that considers supplier lead times, the right mix of demand models, the utility of weather forecasts, and the isolation of promotional activities. By choosing the right forecast frequency and approach, you can significantly improve accuracy and ensure better customer outcomes. Implementing these strategies will help you stay ahead of demand fluctuations and maintain optimal inventory levels throughout the year.

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Is it time to go on a SKU diet? when to dropship, stock, order as needed, or stop selling a part altogether

Offering a large, diverse inventory of items is a huge source of value in the OEM aftermarket. Stocking the complete maintenance catalog for a product, for example, or allowing customers to find everything they need in one place, can be a major source of competitive advantage.

However, over time, the associated costs and complexity can weigh heavily on a business. A “SKU diet” — streamlining your inventory by deciding which items to dropship, stock, order as needed, or discontinue — can improve efficiency, reduce costs, and enhance customer satisfaction. In this article, we’ll outline a strategy for achieving these benefits.

Dropshipping

Dropshipping is when a supplier directly fulfills orders on your behalf, meaning you don’t hold inventory yourself. This reduces holding costs and the risk of overstock, but has downsides as well.

Dropshipping considerations

Availability: Does the supplier even offer direct shipping to your customer? Most overseas suppliers rarely offer dropshipping, and it might be impractical.
Delivery performance: How long does the supplier take to deliver compared to your DC? If suppliers have long dropship processing times, that would be a reason to avoid using their service. Ditto if the supplier’s packaging and presentation is not up to your own standards.
Freight cost + fees: Any multi-item customer order that involves a dropshipment will now have at least two total shipments per order, likely arriving to the customer on two different dates. This increases your total freight cost and also inconveniences the customer. Any dropshipment fees charged by the supplier are also a factor.
Unit cost / bulk: Large or expensive items can be a great fit for dropshipping since stocking those products has such a high cost.
Sales demand: When you stock a low-volume product, inventory turns, service levels, and the risk of excess stock are all worse than they are for strong sellers. Slow sellers are thus often a better fit for dropshipping.

Just-in-time shipping (i.e. “order as needed”)

Ordering a product only when demand occurs allows you to avoid the cost and risk of holding inventory. You are effectively cross-docking the product from your supplier to your customer, through your DC receiving dock. Just-in-time is a good solution for products you would otherwise dropship, but are a bad fit for dropshipping.

Considerations for just-in-time shipping vs dropshipping

Availability: Unlike dropshipping, assuming that you allow customers to backorder product, you always have the option to sell an item that is bought from the supplier only as needed.
Lead time: Compared to dropshipping, lead time is longer, since the order has to arrive at your DC before it is shipped to the customer. And both options are of course slower than if you stock the product in your DC. As with dropshipping, imported items are usually a poor fit for just-in-time, due to lead time.
Cost: Labor costs in your DC increase, since every sale also results in a receipt. Also, like dropshipping, freight costs will be higher, since you have to pay inbound and outbound shipping on a second shipment.

Stocking a product in your DC

Stocking a product usually provides the best customer experience. Lead time is minimized, you have the most control over packaging and presentation, and if all lines are in-stock, you can deliver the order in a single shipment. Of course, this option carries the most inventory risk.

Good attributes for stock products

High sales demand: Items with high sales volumes and consistent demand.
High affinity: Items that are commonly part of large customer orders should be prioritized for stock, to reduce the chance that multiple shipments will be required, or that an order will be held up by one out-of-stock item.
Reasonable size / cost: Pricey or bulky products are less appealing as stock items.
Lack of alternatives: All else being equal, items with long supplier leadtimes or high dropshipping costs are better suited for stock.

When to stop selling a product altogether

At some point, it simply isn’t sensible to sell an item. Even if gross margins are good on paper, removing it from your offering may be more economical if the fully loaded cost of selling the item is too high.

Qualities of candidate SKUs for discontinuation

Equivalent Products: If you offer another product that can fulfill the same application, it becomes less important to offer an equivalent item.
Low Demand: Items with minimal sales history or declining demand, especially if demand is sporadic (which increases the risk that a period of high activity could lead you to overstock).
Low Margin: The lower your gross margin is, the harder it is to sell an item at a profit, especially if it exhibits other attributes on this list.
High Holding Cost: Expensive, bulky, and hazardous items are all more expensive to handle, stock, and sell.
Long Lead Time: Long leadtimes basically multiply the cost of forecast error, since you are effectively predicting sales (and purchasing inventory) to cover longer and longer periods into the future. Since dropshipping and just-in-time are generally not a good fit for long lead time items, discontinuing becomes more attractive.

Case study: Successful SKU optimization

In 2022, Hydrian implemented a SKU rationalization program (i.e. “SKU diet”) for a long-time client, a $150MM revenue aftermarket and OEM parts distributor. After working with the client to establish parameters for deciding how to classify their existing catalog, the following was achieved over the course of the next year:

Stocking SKUs went from 14,500 to 8,250.
The number of products offered on dropship (9,000) remained stable, with around 2,000 products being removed from dropship programs and another 2,000 items being added.
Just-in-time products went from 4,500 to 5,500.
Over 4,000 products were discontinued.
Fill rates increased from 86% to 94%.
Inventory turns increased from 3.3 to 5.5.
Gross profit increased from 34% to 36%.
Revenue increased 8%.

Conclusion

SKU management is crucial for businesses looking to improve efficiency and profitability. By strategically deciding which items to dropship, stock, order as needed, or discontinue, businesses can reduce costs, streamline operations, and enhance customer satisfaction. Implement these strategies to ensure your inventory is aligned with market demand and your business goals.

Want to learn more? Check out the complete video episode.

Master item-level profitability and maximize your product portfolio's potential

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Overseas suppliers, gray markets, and the age-old question: do you want it cheap or fast?

Finding the right balance between cost and speed is crucial in every supply chain, especially in the OEM and aftermarket auto parts market. Distributors often face the dilemma of choosing between cheaper parts from overseas and faster, more reliable, yet more expensive domestic options. In this article, we’ll discuss how to set up a supply chain that balances these competing interests.

Gray market suppliers

The gray market refers to the trade of genuine parts that, while legal, may not be authorized by the manufacturer. While these parts are often sourced from legitimate manufacturers, they bypass official distribution networks, resulting in lower prices.

Advantages

Cost: Prices can be as much as 70% below manufacturer wholesale rates.
Rare or discontinued parts: These channels can provide access to parts that are otherwise difficult to source.

Risks

Availability: Gray markets often have large surpluses of a particular item in one month and then may not offer that item at all for the next several months. Having a secondary supplier is crucial when utilizing gray markets. For this same reason, it’s important to price gray market items carefully. If you lower your sell price dramatically due to low sourcing cost, customers may be displeased if you have to reverse that decision a month later due to gray market availability concerns.
Lead Time: Gray markets often have extended lead times, even in comparison to other overseas options. This can significantly impact service levels and safety stock requirements.
Quality Issues: There is a risk of receiving parts that do not meet quality standards, as gray market suppliers may not adhere to strict quality control measures. Be willing to pay a premium to buy from sources that come from authorized vendors.
Lack of Certification: Parts purchased through gray market channels often do not come with warranties or the same certifications as they do when purchased directly from the manufacturer. Remaining shelf life, when applicable, may be shorter. Worst case, the parts you buy on the gray market may not even be legal to sell in your local market.
Relationship Risk: If manufacturers and key approved suppliers find out about your utilization of gray markets, they may view it unfavorably, which could impact your future relationship with them.

Gap sourcing

Gap sourcing is the strategy of purchasing from a domestic, higher-cost supplier to cover a shortage while waiting for overseas or gray market materials to arrive. This approach helps maintain service levels and avoid stockouts during periods of extended lead times at the expense of gross margin. Having a secondary gap source —- even if they are a competitor — is a must when utilizing import suppliers and gray markets in your supply chain.

Setting up an effective gap sourcing program

Accurate ETAs: Knowing delivery dates for outstanding gray market/import orders is crucial. Communicate with suppliers about open orders and regularly audit the accuracy of their delivery estimates (both the initial estimate at the time of PO placement and at later stages). Good delivery estimates will allow you to predict future stockout periods and how long they will last.
Expediting: Sometimes, free expediting (i.e. simply asking the supplier for earlier delivery) may be adequate to cover a future inventory gap, with no need to find an alternate source. Failing that, a paid option (e.g. expediting shipping) may still be more economical than paying a competitor or other domestic source for a gap-covering, low-margin buy.
Gap lead time: The lead time of your gap source will determine how far out you need to forecast inventory shortages. If you expect to run out of stock in a month and can gap source in a week, you should wait until you are down to roughly one week of stock before placing the gap buy. If demand is lower than expected, or the import order arrives earlier than expected, you may not need to gap source at all. For the same reason, it is recommended to buy no more than a week or two of expected demand at a time from your gap source; you can always place another order next week.
Profit margin: Regular audits of your gap source margin vs your import margin may justify changing your primary source to the domestic supplier. Typically, if the domestic cost is within 25%, we recommend at least exploring the option of making them your primary supplier. When the cost of holding inventory, spilled demand due to stockouts during long import lead times, and dead stock are taken into account, it can often be more profitable to give up gross margin in exchange for speed.

Conclusion

Balancing the cost and speed of your supply chain requires a strategic approach that incorporates various sourcing options, including gap sourcing. By understanding when to use domestic suppliers to cover shortages and how to set up an effective gap sourcing program, you can maintain high service levels and customer satisfaction while managing costs. Implement these strategies to navigate the complexities of the parts supply chain and achieve a competitive advantage.

Library

Demand Planning

Distribution

E-commerce

Inventory Management

Stock Optimization

Supply Chain

Video

Shelf life: How to avoid losing money to expired or obsolete parts

Financial impact of expired or obsolete parts

Product categories prone to shelf life issues

Strategies for managing shelf life and obsolescence

Conclusion

You might also like

Tariff Strategies: Price Breaks, Domestic Options, and Planning for a Downturn

A Comprehensive Guide to Inventory Optimization: Strategies to Overcome Stockouts, Long Lead Times, and Price Pressures

How aerospace MROs can optimize purchase orders for better efficiency

Subscribe to our newsletter

Subscribe

Want to see how your inventory management stacks up?

Library

Demand Planning

Distribution

E-commerce

Inventory Management

Stock Optimization

Supply Chain

Video

How to improve seasonal forecast accuracy for better customer outcomes

In this article, we’ll go over some key concepts:

Exploring the reliability and utility of weather forecasts in purchasing

Short-term accuracy

Long-term predictions

Isolating promotional activities (e.g. black friday sales) from seasonal effects

Historical adjustment

Future planning

Lead time cycles

Ensuring that seasonal purchasing plans take into account supplier lead time

Early seasonal orders

Calculate lead time buffer

Consider holiday variances

Year-over-year vs recency-weighted (i.e. “momentum”) demand models

Key strategies:

Conclusion​

You might also like

Tariff Strategies: Price Breaks, Domestic Options, and Planning for a Downturn

A Comprehensive Guide to Inventory Optimization: Strategies to Overcome Stockouts, Long Lead Times, and Price Pressures

How aerospace MROs can optimize purchase orders for better efficiency

Subscribe to our newsletter

Subscribe

Want to see how your inventory management stacks up?

Library

Demand Planning

Distribution

E-commerce

Inventory Management

Stock Optimization

Supply Chain

Video

Is it time to go on a SKU diet? when to dropship, stock, order as needed, or stop selling a part altogether

Dropshipping

Dropshipping considerations

Just-in-time shipping (i.e. “order as needed”)

Considerations for just-in-time shipping vs dropshipping

Stocking a product in your DC

Good attributes for stock products

When to stop selling a product altogether

Qualities of candidate SKUs for discontinuation

Case study: Successful SKU optimization

Conclusion

Want to learn more? Check out the complete video episode.

Master item-level profitability and maximiz﻿e your product portfolio's potential

You might also like

Tariff Strategies: Price Breaks, Domestic Options, and Planning for a Downturn

A Comprehensive Guide to Inventory Optimization: Strategies to Overcome Stockouts, Long Lead Times, and Price Pressures

How aerospace MROs can optimize purchase orders for better efficiency

Subscribe to our newsletter

Subscribe

Want to see how your inventory management stacks up?

Library

Product categories prone to shelf life issues 

Conclusion

Master item-level profitability and maximize your product portfolio's potential