Solar companies face specific and sometimes unique challenges when it comes to managing their solar inventory. They operate in a highly innovative and disruptive industry with unpredictable demand and continuously (and at times precipitously) declining prices.
Inventory Management is difficult in the best of times. But when it comes to managing Solar Inventory, solar companies have their work cut out for them.
In this article we’ll cover the following topics:
- Types of Solar Inventory
- Specific Inventory challenges faced by solar companies
- Inventory Management objectives for Solar Inventory and
- The best techniques for Solar Inventory Management
What is Solar Inventory?
Solar Inventory is inventory carried by solar companies and can include:
- Solar modules
- Solar cells
- PV materials
- solar paste, silicon wafers, frames, backsheets, junction boxes, PV glass, etc,
- PV Equipment
- PV connectors, racking & mounting, etc
- Batteries, accesories and storage
- Inverters and accessories
- and more
Specific inventory challenges faced by the solar companies
The management of solar inventory comes with some specific challenges which it shares with other highly innovative industries which experience similar demand & price volatility and technological disruption.
If you’re carrying excess inventory which you are not able to get installed, you risk it being made obsolete by new technology and you risk inventory devaluation because of continuous drops in prices.
On the other hand, if you carry insufficient inventory, you risk not being able to service sales demand – which in this industry – is highly unpredictable to start with. Let’s now look at some of these top inventory management challenges faced by solar companies.
How and when do customers decide to install solar panels?
That’s the big question.
And the answer is: Typically when their energy bill starts to go up and/or the government provides incentives for them to switch to solar.
In other words: not easy to predict.
You could look for sales patterns from previous years to see if there is some seasonality to the purchase. Or you could see when certain government incentives are expected to expire and prepare for a surge in sales just before the deadline.
Regardless, your inventory management techniques should assume unpredictable demand and take measures to counter it. We’ll look at some of these techniques later in the article.
The cost of PV systems has been declining for more than a decade and the trend is likely to continue into the 2020s.
While the drop in prices will help fuel demand, it is a serious risk for companies that carry excess solar inventory.
And price drops haven’t always been gradual. At times, they have been precipitous and unpredictable.
If you carry inventory for too long, these drops in prices will cause a devaluation of your inventory and could force you to sell at a loss.
The technique you choose to manage your inventory will need to minimize the stock you carry that isn’t tied to a fixed-price sale order. In other words, it will have to ensure that you have enough stock to serve short-term sales demand while minimizing the risk of inventory devaluation. And this can be quite a difficult balancing act.
By its very nature, the solar industry is highly innovative. The Department of Energy has an excellent resource called the Solar Innovation Timeline where you can see how the solar industry has innovated over time.
While this innovation has improved the throughout of solar modules and helped bring the price down, it has also created a risk of obsolescence which very much impacts inventory management.
Now, bear in mind, that this isn’t obsolescence in the technical sense where a piece of technology starts to sputter and die out. In fact, modern solar panels and modules could easily continue to function for 25 to 30 years.
What we mean by obsolescence is in the classical sense – where today’s technology is rendered obsolete by tomorrow’s technology.
So rapid innovation quickly makes today’s technology and therefore today’s inventory outdated and unwanted.
If you have excess inventory on hand and you aren’t able to get it deployed before the next innovation hits the market, you risk carrying outdated inventory which you would need to devalue, sell at a loss or write-off.
There’s one point to note here: You may need to carry a small portion of old and outdated inventory for maintenance and replacement. You could have customers who will want to replace faulty modules years after installation and so may want to keep a small amount of old stock for this purpose.
Inventory Management objectives for the solar inventory
Apart from the generic objectives that solar inventory shares with other types of inventories, here are the ones that are of particular importance to solar companies.
- Improve Demand Planning
- Improve Liquidity/Cash Flow
- Support distributed storage
- Match labor scheduling to inventory levels
Improve Demand Planning
As you’ve seen earlier in this article, poor Demand Planning can result either in excess inventory or insufficient inventory, both of which are risks for your business.
If you have excess inventory which you are unable to sell, you risk being stuck with devalued stock. If you are under-stocked, you risk not meeting sales demand.
So, the goal of inventory management will be to predict, based on your sales forecasts and an analysis of your historical sales patterns, how much product should you acquire and keep in inventory. This is arguably the most important objective of inventory management.
Improve Liquidity/Cash Flow
Tightly linked to having the optimal amount of stock on hand is your liquidity or cash flow situation.
For many companies, their inventory is the most valuable asset on their books.
And unless you sell that inventory, it is a non-performing asset. Your cash is just tied up in it. And this is cash you desperately need for marketing, sales, payroll, insurance, etc.
Now, you may have favorable payment terms with your suppliers. Or even better, you only place orders with your suppliers after you’ve collected advance payments from your customers.
Regardless, the safest bet is to limit the amount of inventory you carry that’s not directly for a sale order that you have in your hand. So, one of the key objectives of inventory planning is to help preserve your capital by limiting the amount of “yet-to-be-sold” inventory.
Support distributed storage
When it comes to solar inventory, Storage is a non-negligible cost.
You probably have warehouses spread across the geography in which you operate. Managing a single warehouse can be tough enough but managing inventory across multiple warehouses can be quite a task.
The solar industry has an additional “portable storage” in the form of trucks. When a crew is called to do an installation or to repair an existing installation they need to carry not only the parts, components, equipment, and material needed for that job but also additional items which might be needed at the last minute.
And so, an important objective of inventory management in the solar industry is to track inventory not only across multiple warehouses but also across multiple trucks, which themselves, can be considered as mini-mobile stores.
Match labor scheduling to inventory levels
An important aspect of a solar installation or a maintenance job is to ensure synchrony between your resource planning and your inventory management.
The last thing you want is to accept a job, schedule the crew, and then discover that you are missing parts needed for the job. Matching the scheduling of your labor resources and your inventory levels can prevent cost overruns, labor overruns, and customer dissatisfaction.
Best techniques for Solar Inventory Management
There are plenty of Inventory Management techniques practiced in industry. In this article, we’ll review a few of them that are most relevant to solar companies.
- Reorder point formula
- Safety Stock
With Reorder Point inventory management, you’ll look at your company’s past sales history and future sales predictions and decide on Reorder points for all of the products, parts, components, etc. in your inventory.
When the Reorder point is hit, you have to order more inventory. This can be programmed to happen automatically in most modern inventory management software.
With Consignment Inventory the stock in your warehouse is still owned by your vendor and you only need to pay for it once you’ve sold it. This can be great for your liquidity as the risk is assumed by the vendor who will take the stock back in case you do not manage to sell it.
With Safety stock inventory management, you keep some stock on hand more than what your sales projections require.
Safety Stock is a buffer that can be very handy not just for unexpected sales but also for last-minute changes to orders.
For example, let’s say you have a crew out in the field working on a new installation of solar modules on the roof of a customer’s house. And the crew realizes that they could fit more modules than originally envisioned in the contract.
Now, if they are carrying a small safety stock in their truck, they could immediately propose an upgrade to the customer and fulfill the order change right away.
- The volatile nature of the solar industry makes Solar Inventory management a challenging task.
- Excess solar inventory can very quickly be made obsolete by new technology.
- Solar inventory can also get devalued because of frequent price drops.
- Sales cycles are not very predictable because demand is closely linked to consumers’ energy bills, price volatility and incentives provided by governments.
- Solar Inventory management needs to help improve demand planning and liquidity/cash flow. It also needs to help accomplish distributed storage and match labor availability to sales orders and inventory levels.
- The best techniques for solar inventory management are the Reorder point formula, Consignment and Safety Stock.