The manufacturing and technology industries are constantly evolving. Characterised by fast-paced tech evolutions and decreasing component lifecycles, companies often end up with surplus electronic components that are no longer needed for production. Holding surplus stock has several cost implications on a business.
Depreciation and obsolescence
All electronic stock will face depreciation as time goes on, but due to the inflated costs during allocation markets, components purchased during these periods will see a greater depreciation than other inventory. Some of the stock will only sell for a fraction of the original purchase price, and with no immediate signs of a market recovery, this number may only depreciate further.
As time goes on the parts may reach end of life (EOL) or become obsolete, or – if demand is low enough – even face instant obsolescence in favour of more profitable components.
While in some cases obsolete stock may increase in value, it is risky to keep it. It would be a gamble to hold the stock, hoping for a shortage to boost the price, which is rarely the case. It is also likely that newer designs may replace the parts altogether, meaning these parts never regain any value.
Inventory carrying costs
The cost of holding onto stock goes far beyond just the purchase price. Inventory carrying costs can quietly add up, impacting profitability over time.
Included in the inventory carrying costs are:
- The cost of the capital
- The inventory service cost
- The inventory risk cost
- The storage space cost
The capital costs are made up of the money invested in the inventory and the interest added.
The risk cost of inventory is the shrinkage of inventory, theft, administrative errors, and most importantly in this case, value depletion.
Storage space cost encompasses the rent paid for your warehouse space, heating, lighting, transportation, and any other costs for maintaining the physical facilities. Handling and maintenance will be variable depending on the volume and type of stock held.
Warehouse space and stock management
Aside from financial costs, the physical impact of keeping excess stock can also have a negative effect on your business.
If storage space is taken up by unnecessary inventory, it means there is less space available for the stock you actually need. It also means that there is less flexibility when it comes to manoeuvring stock, more time spent rotating inventory, and less space to allocate to production. It will take staff longer to locate the stock they need, and there will be more management overhead when it comes to admin and stock audits.
Impact cash flow
Free cash flow is crucial for the smooth running of any business. Whether it’s covering unexpected expenses, responding to a sudden spike in demand, or investing in urgent repairs or equipment, having liquid assets available is essential. When capital is tied up in slow moving stock, it reduces your financial flexibility. This can leave your business vulnerable to external pressures or internal demands that require quick, decisive action. In tight markets, being able to move quickly can be the difference between staying ahead or falling behind.
Opportunity cost
The longer you hold onto excess stock, the more you lose in terms of what that money could be doing elsewhere. The opportunity cost is the unseen loss of alternative investments.
For example, capital tied up in ageing components could instead be used to purchase in-demand parts, upgrade equipment, fund product development, or take advantage of supplier discounts. Beyond financial investments, there’s also a strategic cost: delayed decisions, missed partnerships, or foregone market opportunities. These losses may not be visible on a balance sheet but can significantly impact long-term growth.
Conclusion
Holding onto excess electronic inventory might seem like a low-risk move, but as shown in this article, it can come with a range of hidden costs, from financial strain to missed opportunities.
While selling depreciated stock may feel like admitting defeat, delaying that decision often leads to greater losses. When you consider the cumulative impact on your cash flow, operations, and strategic agility, selling your surplus inventory could save you more than you realise.
At Cyclops, we’ve been helping our customers unlock the value of their excess inventory for the past 30 years. Contact us today to learn more about our excess management and selling options.
Author:
Dionne Pentland, Manager, Cyclops Excess
This article was originally published in The Practical Guide of Excess Inventory e-book
