Deadstock Or Forgotten Treasure?

In a world where technology is advancing at a breakneck speed, are the deadstock electronics components in your warehouse on the verge of becoming obsolete relics?

A typical warehouse of an electronics OEM or an EMS (electronics manufacturing service provider) is stacked with unused components—like buried treasure waiting to be discovered. But instead of riches, this treasure represents tied-up capital, logistical headaches, and missed opportunities. This is the reality faced by electronics manufacturers grappling with deadstock, a challenge that extends far beyond the confines of their storage facilities.

“Non-moving electronics components are akin to gold or currency which is just boxed up and unutilised! We have around `10 million worth of unutilised inventory lying in its store,” reveals Indian electronics contract manufacturer TESCOM’s Director Nandini B. The bound capital in unnecessary stockpiles hampers the ability of electronics manufacturers to fulfil orders promptly, disrupting the supply chain.

At its core, deadstock is more than just surplus inventory—it is a financial burden that weighs heavily on the bottom line. Tied-up capital that could fuel innovation or drive operational improvements is instead immobilised, trapped in a labyrinth of excess components. The costs of storage, depreciation, and missed opportunities loom large, casting a shadow over profitability and growth prospects.

Electronics technology is rapidly evolving, raising the fear of obsolescence of components which could today be the creme de la creme of electronics innovation. With rapid technological advancements, short product life cycles, increasing competition, price pressures, and environmental regulations, electronics manufacturing is no fool’s errand. So naturally, every penny saved counts!

Tracing the treasure

So how did this excess stock come into existence in an EMS? For that, one needs to understand the basic categories of on demand production that an EMS encounters—prototypes, pre-series, and series. Shamim Alam, Assistant Manager – Sourcing, Cyient DLM, told EFY, “Prototype demand is obviously lower, with pre-series falling in between, and series being the highest. This determines the inventory strategy of the EMS.”

Elaborating on the distinct types of inventory management, Alam continued, “For prototypes, EMS manufacturers mostly rely on just-in-time inventory management, with some buffer for potential failures or losses. You can’t afford to keep excess inventory because components might get upgraded, rendering them obsolete. For pre-series and series demand, a good inventory management ratio involves maintaining around 30% of the required components in stock.”

“Your inventory management strategy should align with the type of demand you are catering to and the current market scenario,” says Alam.

In an EMS company, there are two approaches to stocking inventory—made-to-order and made-to-stock. Manufacturing is primarily driven by demand rather than producing goods and then trying to sell them in the market. If the guidelines are clear, one wonders what might be filling up the inventory shelves of EMS companies?

For this we need to travel back in time to the year when a pandemic brought the entire world to a stand-still, reducing the production capacity of the entire electronics components supply chain. Faced with widespread shortages and rising demand, manufacturers started hoarding components to increase their inventory build to meet customer demands, and a new system was formed.

The conundrum of components

Procurement of components is based on current demand from various customers. Goods entering the factory are always accompanied by a purchase order. The problem arises when the ordering is not aligned with actual utilisation, resulting in ad-hoc purchases, which ends up as unused or partially utilised inventory that eventually becomes slow-moving stock and may end up as dead stock. Now the question arises, why is the ordering process failing to prevent this?

The answer lies in the material that is being ordered. Unlike regular orders, electronics components are not procured on a demand basis. Usually, most electronics component suppliers have a minimum order quantity (MOQ). Nandini reflects back on the electronics component shortage. “We were trying to maintain a stock of long lead time items as per our projects, but we could never get a forecast for more than 3-4 months whereas the lead times were like 52-74 weeks,” she says.

She elaborates, “If I have a forecast and an ordering pattern which is already known to me, I will start ordering for the next six months. The problem arises when I don’t have all the components at the same time to make a product. So, if one product needs 200 electronics components, even if I have 190 in stock, I will not be able to produce the product because I need all 200. So, at any given point in time, we will have a huge stock of mismatched inventory.”

To get the manufacturing process back on track, most electronics manufacturers resort to buying the missing components to meet the monthly demands, which ends up in a mismatch in the future.

With most component manufacturers located outside India, domestic electronics manufacturers lack any control over the acquisition and distribution of components. “Getting the component supplies diverted to India is a bigger challenge. It is like gambling. We seek allocation from distributors. Oftentimes, even after allocation, the components might get deallocated again,” explains Nandini.

Decommitment remains a major concern for EMS companies. “If there is a three-month timeline, and we experience pushouts due to unready components, it leads to decommitment. Maintaining our credibility with customers is crucial, so we are constantly juggling to mitigate such scenarios,” says Alam.

Resolution to resuscitate

While the government puts the policies in place, what does an electronics manufacturer do? Both Alam and Nandini adopt different resolutions with respect to operations and policy, respectively.

While tier one EMS companies may have stable ordering patterns due to manufacturing certain products at scale, companies with high mix-medium volume orders, are unable to rely on just-in-time inventory management. “OEMs expect timely supply without stocking inventory themselves, placing pressure on EMS companies to maintain stock. This dynamic leaves EMS companies caught between component suppliers and OEMs, bearing the burden of inventory management. This imbalance raises concerns about meeting sudden demand surges. While just-in-time practices may work for some, a balance between inventory stocking and on-time delivery is essential for the industry’s stability,” explains Nandini.

Alam believes that cross functional teams, including purchase and marketing, bear the responsibility of feeding correct demand projections into the system. To tackle decommitment, the current method involves a purchase price variance (PPV). “We either wait for the new delivery schedule or expedite the current purchase orders. If the customer is flexible with slight delays, we continue with the current orders, else send a fast-track purchase order at a higher price to secure components from suppliers with available stock,” he elaborates.

Inaccurate or changing projections due to an erroneous method of calculating demand forecasts also play a key role in mismatched inventory. An EMS manufacturer needs to prioritise between firm customer orders and forecasted demands. “For firm demand and firm sales orders, 100% ordering is essential. Additionally, they may consider ordering for only 50% of the forecasted demand initially. As projects mature and actual demand crystallises, based on previously agreed contract volumes and resulting sales orders, the purchase teams can then initiate orders to meet forecasted demands, explains Alam.

With multiple enterprise resource planning systems in place, assimilating information about various sources, suppliers, and competitive information about components is easy. The challenge lies in gathering this data. Highlighting the need for a dedicated ERP system, Alam explains that traditional ERP systems do not distinguish between firm and forecast orders. “It treats all demand as total demand. The ERP then generates output detailing required raw materials and the schedule for purchase requisitions (PR). Purchase teams must adhere to this schedule, ensuring timely conversion of PRs to orders, especially for long-lead time items,” he says.

High functioning ERP systems also come at a high price point, which could impact profitability of a mid-range EMS company. While companies offering open source based ERP systems are many, such a dedicated inventory manager for EMS companies is still in the works. This brings us back to the initial conundrum—what do we do with the excess inventory lying in the shelves of EMS companies?

There are ways to dispose of old inventories with the foray of companies such as Rochester Electronics that specialise in managing old inventory by repurposing, extending its lifecycle, optimising its use, and ensuring responsible disposal. Rochester finds ways to make old components useful again by testing and refurbishing them. They also analyse market trends to find new uses for old inventory.

EFY also spoke to small component distributors in India and came across a new business model that gained prominence in the middle of the pandemic. Sources stated that during the chip shortage, many component distributors were able to successfully sell off deadstock inventory to markets outside the country. “I bought ICs as a part of deadstock inventory for `80 in India, and I was able to sell it at a profit in China because the same cost `160 there. While this is a matter of luck, I have been in this business for many years now,” revealed a source. Another component distributor confirmed the sale of excess inventory to markets in North America, Europe, and China.

Praveen Kumar, Founder and CTO of Convora Technologies, is building a solution to tackle the challenge of disposal of deadstock inventory through his startup Elecxtra—a dedicated marketplace to facilitate buying and selling of excess inventory between EMS companies, electronics OEMs, and others. Due for launch this year, the platform will allow EMS companies with deadstock inventory to register their components at the price they bought them.

“This price would be cheaper than the current market price. Our SaaS platform collects subscription fees from sellers (EMS and OEM) to publish their inventory at a nominal cost. Out of this, Elecxtra takes a minimum (3% to 7%) percentage, added to the price for the buyer as convenience fees. The seller ends up diluting the deadstock inventory at the price they originally bought it. The deadstock components can be re-circulated in the market to be used by buyers who need them, without waiting for painful lead times.

Nandini believes that this approach could ease out the pressure on EMS companies to a certain extent. “A verified portal can make a note of all the dead inventory that EMS companies are holding, and everyone can fish something out of this portal to get what they want. This way the reliance on component manufacturers and distributors decreases,” she opines.

The impact of deadstock goes beyond mere dollars and cents. In a world where agility and responsiveness are of utmost importance, excess inventory disrupts the smooth flow of the supply chain, creating bottlenecks and logistical nightmares. It obscures genuine demand signals, complicates production scheduling, and undermines operational efficiency—all while masking the underlying inefficiencies lurking within the supply chain.

By adopting better inventory management processes, supply chain optimisation, and demand forecasting, electronics manufacturers can navigate the maze of deadstock. Advanced analytics and AI-driven insights can allow EMS companies to embrace agile manufacturing practices.

In the end, the battle against deadstock is not just about managing surplus components—it is about mastering the art of supply chain resilience and reimagining the future of Indian electronics manufacturing in a world defined by constant change and innovation.