Obsolete Inventory Guide: How to Identify, Manage & Avoid It

As we start to perform a regular Slow-moving and Obsolete Inventory analysis, it is crucial to look at past periods’ performance and analyze the trends in the ratios we focus on. Only then can we start to forecast inventory movements with more accuracy, identify the potential dead stock, and estimate our goods’ life span. To account for this decrease in value, we write down or entirely write-off such items in our accounting records and recognize a loss. Slow-moving and obsolete Inventory can become a significant problem for many businesses. One of the key ways to prevent inventory from going obsolete, and even enter the slow-moving territory, is to nail down solid inventory tracking processes.

More specifically, when companies overestimate how many consumers will purchase a product, they often overstock the item, and customers do not purchase the product as quickly or as frequently as the company projected. Ultimately, your inventory may have become so obsolete that there’s no demand for it whatsoever. If even a highly-experienced liquidator refuses your inventory, writing off the obsolete products may be your best bet. While businesses will often liquidate all of their inventory before closing shop, a company can always consider liquidating a certain segment of their inventory that’s fallen into obsolescence. To liquidate inventory, you’ll want to work with a surplus reseller specializing in moving “unwanted” inventory.

Inventory obsolescence as a percentage of total inventory

Kristina is the Director of Marketing Communications at ShipBob, where she writes various articles, case studies, and other resources to help ecommerce brands grow their business. To learn more about how ShipBob can help you optimize your supply chain, click the button below to start the conversation. If that’s the case, you can avoid over-ordering by buying less inventory more often rather than purchasing inventory for an entire year.

In many cases, time restrictions can leave these system calculations incomplete and inaccurate. The following analysis relies heavily on reporting from your inventory system. Standard reports are not always readily available, be prepared to have custom reports made for this analysis. More sophisticated inventory systems have several calculations to assist in managing inventory (re-order point, EOQ, etc.) but for smaller companies with less sophisticated systems, custom inventory reports will be needed. One of the most common approaches is to try and realize the goods at a discount price.

How Does Obsolete Inventory Work?

SCMDOJO aims to help Supply Chain Professionals grow by providing high-quality supply chain on-demand courses, guides, best practices, tools and consulting from industry experts. This Iconotech video looks at the cost savings if you switch from pre-printed case inventories to generic case inventories. The second example of Item AB124, with the same Quarter on Hand (QOH) and total usage, tells a completely different story. “Months on Hand” is https://www.vizaca.com/bookkeeping-for-startups-financial-planning-to-push-your-business/ just over three months and usage/sales are increasing which gives a much different outlook. A typical calculation of Months on Hand (MOH) or Days on Hand (DOH) for Total Year Usage, indicates that both items are both at 4.4 months on hand (MOH). I will walk you through one of the simplest forms of overall analytical review you can perform on stock on hand at your company, to get you started on the journey of eradicating obsolete Inventory.

Businesses can use these numbers to calculate inventory turnover, which is a ratio of how often it sells-through inventory over a certain period of time. Real-time access to data across the supply chain is beneficial for real-time inventory management. This gives you the most current information about inventory levels along with other details, such as warehouse receiving and production time lines. Supply chain forecasting involves using data and research to make predictions on all aspects of the supply chain to ensure a business runs smoothly and continues to grow. This includes having insights into production lead times, labor needs, warehousing, order fulfillment, and shipping. Obsolete inventory is inventory that a company still has on hand after it should have been sold.

How to Account For Obsolete Parts Inventory at Your Automotive Dealership

Purchasing should be data-driven and closely tied to forecasting and demand planning. When it’s not, and the purchasing team is buying based on anecdotal knowledge or other unreliable factors, it leads to problems. Deal-hungry purchasing managers willing to buy everything in bulk to reduce the cost per item can also leave a company with too much product on its hands. Accumulating too much obsolete inventory can be bad for business since it cuts into profit margins.

Obsolete inventory also shows up as an expense on the balance sheet, one of a company’s most important financial documents. It’s critical that companies regularly take a close look at inventory levels and trends as part of their efforts to maximize supply chain visibility and efficiency. The U.S. Census Bureau says that at the end of July 2020, the total business inventory/sales ratio, based on seasonally adjusted data, was 1.33.

Benefits of Shifting from a 3PL to 4PL Business Model

First, as you find yourself facing slow-moving and excess inventory heading towards obsolescence, you can attempt to sell it. At this stage, your inventory may still sell using strategies such as bundling, discounts, and remarketing. Secondly, failing to produce a high-quality product will lead to returns, complaints, and an overall fall in sales. Without the proper product testing and introduction in the product’s lifecycle, there isn’t that allotted time to ensure a product is in good condition and able to sell at profitable rates.

• There are a few ways to keep obsolete inventory from sitting in your warehouse to the point it no longer holds any value, which at that point, nothing can be done.
• Plus, visual inventory systems like Sortly allow you to see what you have on hand—an extra helpful tool when determining whether certain items are at risk of becoming obsolete.
• Also, make sure you confirm the process with your local tax authorities, as there may be some requirements or limitations.
• An organization may find that certain products are highly seasonal—they’re much bigger sellers in the fall and winter than the spring and summer, for example—or that sales dropped off suddenly for a certain category of goods.

It can be difficult to predict when certain products will become obsolete, but it is crucial to keep track of trends in the industry and be prepared for such a situation. For example, when lead paint was banned from residential use in 1978, many manufacturers were left with a lot of unsellable inventory. For example, if your company produces clothing for teens, you must keep up with the trends to remain competitive. If your warehouse consists of items that are no longer in fashion, it could quickly become stale inventory. On the other hand, if you are not spending money on storing your obsolete inventory, it may take up space you could use for other, more profitable inventory ventures.

Inventory obsolescence occurs when a company determines that certain products can no longer be used or sold because demand is so low. Once an item reaches the end of its product lifecycle and a company feels certain that it will never be used or sold, a business will usually write down or write off that inventory as a loss. Perhaps an item breaks easily or doesn’t work as advertised, due to either a design oversight or a mistake in the manufacturing process. Customers may return these items—a problem in itself—and leave negative reviews. Similarly, a new item that has no advantage over similar products already on the market could underperform and result in excess inventory.

• Ultimately, your inventory may have become so obsolete that there’s no demand for it whatsoever.
• To get a more detailed and actionable insight, we can separate our stock into groups of similar items.
• It refers to products that are needed (they are NOT old stock or previous collections) but are in excess.
• This can help them avoid the negative financial and operational impacts of obsolete inventory.
• Along with inventory management, having visibility over your inventory at all times is key.
• Knowing the company’s history of sales and overstock can help you understand business trends and product movement patterns.

After this stage, as the market changes and demand shifts, it will enter a decline in profitability and relevance. If these products are not sold before it reaches the end of its lifecycle, it becomes obsolete. Streamlining supply chain management can help businesses reduce lead times and avoid the accumulation of obsolete inventory. By improving communication and collaboration with suppliers, businesses can more accurately predict demand and adjust production levels accordingly. Obsolete inventory is a term that refers to inventory that is at the end of its product life cycle. This inventory has not been sold or used for a long period of time and is not expected to be sold in the future.