Inventory management is a tricky game.
In an ideal situation, you would want to sell every last bit of inventory or have sufficient stock during high demand, but that is hardly ever the case.
You are likely to encounter various unexpected situations in the market that impact the demand and inadvertently, your stock too. And an excess of inventory results in obsolete inventory.
What is obsolete inventory, how does it emerge, and what are the ways you can avoid it? This piece will talk about all of that and more.
What is Obsolete Inventory?
Obsolete inventory, also known as dead or excess inventory, refers to goods that a business cannot or is not able to sell because they have reached the end of their lifecycle.
No inventory becomes obsolete inventory at a go. It happens over a period of time when the inventory first becomes slow-moving because of low demand. It then turns obsolete when a business deems the inventory to be no longer sellable or usable for the market.
The timeline for products may differ, but every product has the potential to become obsolete at some point. However, some products are more prone to obsolescence considering their shelf life. These include goods like electronics and apparel.
The reason for this can vary. Some products are halted because of new innovations in the market. New technologies and trends, and an increase in competition, can all cause a gradual or sudden change in demand which can lead to an increase in obsolete inventory.
Warning Signs of Obsolete Inventory
While in some cases obsolete inventory can be inevitable, you would always want to avoid it or at least decrease its impact and the number of goods that would go to waste. Luckily you have some warning signs that can help you gauge if your inventory is going obsolete.
What are these factors? Let’s have a look.
Slow Sales
Your sales data is an evident indicator of demand. You slowly understand a pattern that your numbers are not what they used to be. Historical sales data can be very crucial in identifying if you start having excess inventory. It helps you determine declining sales trends and unsold inventory that lose relevance in the current market.
To analyse sales, consider using tools and techniques such as inventory turnover ratio, inventory analysis software and reports, and trend analysis to understand the low turnover rates. Based on that, you can take actionable steps to balance the inventory and reduce the chances of excessive inventory.
Ageing Stock
A product life cycle takes into account the stages that a product goes through. While the demand is significantly high during the introduction and growth stages, it declines in the later stages. In the earlier stages, there are chances of a stockout, and in the later ones, there are chances for the inventory to become obsolete.
You can monitor the product life cycle and reduce the storage of inventory when you realise the product has reached the latter stages of its life cycle. You can set up an ageing threshold and decide the timeline based on the type of product. For example, apparel and electronics can have a threshold of 6-12 months while vegetables or fruits may have a threshold of mere 2-3 days.
High Carrying Costs
Carrying costs are the costs that a business incurs in storing inventory for a particular period of time. The higher the carrying costs, the greater the chance of the inventory being slow-moving or obsolete.
Carrying costs can largely be a result of a lack of transparency in inventory movements. Conduct regular inventory audits to monitor the carrying costs on a regular basis. This includes conducting periodic physical inventory counts and comparing them to the stock in systems.
Excess Stockpile
When you have a lot of unused stock in the warehouse or fulfilment centre which is not moving, chances are that those goods are not in high demand. To foresee this, you can conduct physical inventory counts and use automated inventory tracking systems to monitor the inventory level on a regular basis. With up-to-date inventory records, you can prevent the accumulation of obsolete inventory and take the required action in advance.
Obsolete Inventory Examples
How many times have you wondered about what happens to the old Apple smartphones as soon as a new model is launched? While they may not become completely obsolete, you do understand that their price and demand are not what they used to be.
Gradually, you will notice that the stock is piling up. In the case of smartphones, innovation happens at a fast pace where the new model replaces the old one. To avoid excessive stock, it is best to reduce the number of units you order at the time of new launches and the introduction of new models in the market.
Aside from electronics, the food, bakery, and beverage industry is also prone to obsolete inventory. This is because their sales are time-sensitive and need to be sold before they expire. Lack of sales can result in writing off unsold batches of cookies, breads, or juices.
Even the B2B market is prone to the risks of obsolete inventory. For example, let’s say you’re dealing with the auxiliary parts of a car. The company that manufactures the car announces that it is closing the production of that particular model for which you are selling the auxiliary parts. Naturally, if they stop the production, they don’t need the raw materials and you would be left with excessive stock that no one wants to buy. Eventually, you write them off since they are of no use.
In case of a new launch or markets with similar patterns of demand and supply, you can predict and prevent slow-moving inventory. However, when other external forces come into play such as government policies or halts of production, there is little you can do about preventing obsolete inventory.
A prominent example would be the ban on lead paint for residential use in 1978 in the US. It led to considerable unsellable inventory with the manufacturers. Some other examples include the ban on plastics or other products that aren’t sustainable owing to climate change. With such regulations, manufacturers can hardly predict and generally incur losses from obsolete inventory.
How Does Obsolete Inventory Hurt Your Business?
Obsolete inventory results in many financial and warehouse repercussions for a business.
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It blocks the working capital of your business. The money cannot be utilised in other ROI-generating activities like new technology, marketing, or recruitment.
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Obsolete inventory takes up valuable storage spaces in warehouses and increases the carrying costs that a business has to eventually incur.
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Obsolete inventory negatively impacts the inventory turnover ratio.
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It also results in losses in terms of sales since you have to sell them at discounted prices and lower than the net resalable value. In some cases, you even have to write them off altogether if the goods are not deemed for consumption in any manner.
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Consider the fruits and vegetables examples. These discounted sales and decreases in revenue can affect the bottom line of a business and change the trajectory of the annual balance sheet. The cost is usually absorbed in the Cost of Goods Sold in the profit and loss statement.
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If a business witnesses obsolete inventory on a regular basis, chances are that its supply chain will be disrupted considering the lack of liquidity and impact on the business as a whole. The idea should be to avoid obsolete inventory at all costs but even if you incur them, ensure that it happens once in a while where your business has the capacity to encounter a minor setback.
What Are the Causes of Obsolete Inventory?
While we discussed the basics of obsolete inventory that results from innovation or changing trends, let’s take a closer look at these causes in detail.
1. Changes in Consumer Preferences
Changing consumer preferences can lead businesses to discover that the products that rule the market are no longer as appealing to consumers. The reason can vary from changes in consumer demographics or consumer behaviour.
Changes in consumer preferences are widespread in the retail or fashion industry where a particular clothing style can enjoy popularity for just weeks or months before a new collection replaces it. To prevent obsolete inventory in this case, proper demand forecasting is a must.
2. Inaccurate Inventory Forecasting
Continuing on the point of accurate demand forecasting, it is needed not just to keep up with the changes in consumer preferences but also to maintain just the required inventory to make optimum use of the storage space. To ensure your inventory forecasting is accurate, consider taking historical sales data into account and market insights to arrive at the best decision.
Having said that, understand that inventory forecasting is never 100% accurate but incorporating various data can at least minimise the risks of having excessive inventory in the warehouse. If you determine a pattern when the demand is low, you can at least prevent over-ordering by buying less inventory.
3. Lack of Supply Chain Knowledge
Inventory and efficient warehouse management is at the heart of an online business, so it’s important to have access to data that provides insights into how well your supply chain is performing.
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, labour needs, warehousing, order fulfilment, and shipping.
Having access to supply chain data can help you improve supply chain efficiency, including how well inventory is managed.
4. Irregular Supply Schedules
Your supplier communication needs to be solid if you want to avoid stock shortage or surplus. Late shipments or early supply can lead to extra inventory and missed revenue. This can only be solved with effective logistics and freight management and building trust with suppliers. Bad suppliers and their malpractice can also lead to delays and inaccuracies that can lead to obsolete inventory and high storage costs for you.
5. Minimum Order Quantities
Many suppliers have the clause of the minimum order quantity but this comes with its own risks. Oftentimes when you realise that the demand is declining but you still have to place the order amount imposed by the supplier. Businesses usually want fewer parts or raw materials and the minimum order quantity usually results in obsolete inventory later. It is important to negotiate with the suppliers about the order quantities if there is a fall in demand.
6. Inaccurate Lead Times
To optimise inventory, you first need to accurately predict lead times that are a part of the order cycle time. It helps you know how frequently you need to place a new order. However, most businesses fail to do so accurately. Supply ordering decisions based on assumptions and rules of thumb often lead to miscalculations and excessive inventory in the warehouse. Again, go back to your supply deals and negotiate lead times or measure their performance against them. If the suppliers comply, you can get accurate data to predict lead times.
Top Strategies for Managing Obsolete Inventory
1. Liquidation and Disposal
If the obsolete inventory is deemed to be unsellable, you can liquidate it through third-party channels like auction websites and inventory liquidation companies. There are many liquidators who are ready to buy leftover inventory at discounted prices and resell it. Their established channels help you reach a large audience base and allow you to sell your inventory at a lower cost. At least, that will save up your costs on storage and make way for storing more profitable items.
Liquidation and disposal is a loss-making activity where you’re selling the goods at almost a negligible price. And yes, while it’s better than writing the expense off, you can still try other marketing methods to sell the inventory to their rightful customers.
2. Rebranding and Repackaging
Effective marketing strategies can work wonders for your slow-moving stock. However, it may not work for all industries, especially if you’re dealing with products that have limited shelf life. But for other products that are facing a lack of demand due to new technological models or innovation, you can still appeal to customers through rebranding and new packaging. This way you can target new customers, geographical areas, and demographics that you previously didn’t pitch to. However, you have to take into account the investments into marketing and if the return on ad spend is worth it.
To target the new markets, you can opt for providing discounts or special offers just for the purpose of discarding the excessive inventory. Another action you can take is to recycle. If your inventory is made of recyclable materials, you can sell the same to recycling factories.
3. Inventory Analysis and Assessment
While inventory audits are something every warehouse manager needs to do regularly, you can use them as a means to prevent obsolete inventory. Practise just-in-time delivery if possible for your industry. It helps you maintain optimal stock levels and identify slow-moving items.
You can take preventive actions before the goods become obsolete and have to be written off. You can manage inventory by assessing the trends that may contribute to overstocking and storage space. Moreover, regular inventory analysis can improve inventory turnover ratios and help you keep just as much stock as you need at home.
4. Inventory Forecasting
As we checked before, inaccurate demand and inventory forecasting are some of the major reasons why businesses have to deal with slow-moving and obsolete inventory. The solution to that?
Accurate inventory forecasting
A lot of businesses have embraced modern technologies that allow them to predict market trends based on historical data and sales trends. Doing so can even help you in predicting customer demand. But this prediction needs to be more advanced than the traditional guessing game.
Leverage historical data and seasonal patterns to create data-driven forecasts. Advanced inventory forecasting and inventory management software can enhance your ability to anticipate fluctuations in demand, guide you to order just the right amount of inventory level and minimise the risk of obsolete inventories.
5. Supplier Negotiations
A lot of causes associated with obsolete inventory have to do with poor supplier relationships. It can either be that there hasn’t been clear communication about the shipment, or the quantity, or that you have to comply with the minimum order quantity even in times of low demand.
In that case, revisiting your supplier agreements is the best way to reduce the amount of excessive inventory. As soon as you notice that there is ample slow-moving inventory at the warehouse, consider notifying your suppliers to reduce or cancel the supplies of new orders immediately.
6. Writing Off Obsolete Inventory
Finally, when you think you’ve exhausted all options to resell or liquidate, you can write off obsolete inventory as a loss. According to the Generally Accepted Accounting Principles (GAAP), obsolete inventory needs to be shown as an expense and use an inventory reserve account to show the loss.
How to Prevent Obsolete Inventory?
While we have discussed the implications of obsolete inventory and its preventive measures to an extent, consider the following activities to have a permanent place in your supply chain to avoid obsolete inventory at all costs.
1. Effective Inventory Management
As discussed before, forecasting is the bare minimum for the modern supply chain that deals with the volatile market. Make inventory management a core practice in your warehouse management. Invest in its resources, and software, train personnel to study historical demand and seasonal trends, and how to leverage data to build forecasts.
Having an accurate representation of the changes in the market and having the ability to predict them can do wonders for your inventory management. It will help you order just the right amount of inventory, optimise the storage space in your warehouse and account for all the internal and external factors that can impact the level of inventory in the warehouse.
2. Market Research and Trend Analysis
Before ordering inventory or doing any kind of business where you need ample storage space and an optimised supply chain, it is important to know the market you’re dealing with. You need to consider all the demographical, geographical, and legal implications of working in a particular area.
A lack of knowledge about the people and the place can lead to unsold products that can ultimately lead to loads of obsolete inventory. This data too, you can get from inventory and order fulfilment tools. You can consider relying on a 3PL provider that provides such insights using advanced analytics.
3. Diversification and Product Innovation
Relying on just one product can drastically lead to a business failure and loads of obsolete inventory if things go haywire in the market about that particular product. Instead, it is best to diversify your product offerings and continually bring innovations so that you can keep up with the consumer needs and never encounter a situation where your products are obsolete.
Conclusion
While in some cases obsolete inventory is inevitable, it doesn’t have to disrupt your business or your balance sheet. Take actionable steps to avoid them in the first place and utilise technology and software to accurately forecast demand and make smarter and well-informed inventory decisions.
The end goal always needs to be zero obsolete inventory so that the bottom line remains efficient and that businesses can drive their sales and revenue with effective inventory management. Build your supply chain in a manner that leaves little to no room for obsolete inventory but even if it does occur, you have mechanisms in place to manage them or to write them off eventually.
Managing inventory in a way that it doesn’t become obsolete requires advanced order fulfilment solutions that PACK & SEND provides. Contact us to know how we can intervene and help you with excessive stocking and optimise your supply chain.
Frequently Asked Questions (FAQs)
Does Obsolete Inventory Hurt a Business?
Obsolete inventory occupies valuable storage space, has to be written off in the books of accounts, and is treated as a loss. All these can hurt the profitability of a business and disrupt the supply chain if it is in larger quantities.
What to do with Obsolete Inventory?
There are many ways you can deal with obsolete inventory. You can remarket it and resell, sell it at a discount or on a flash sale, liquidate it through suppliers, or write it off and note it as losses in accounting.
What Causes Obsolete Inventory?
There are various internal and external factors that cause obsolete inventory. Some of them are lack of inventory management, inaccurate demand forecasting, lack of supply chain data, changes in consumer preferences, and product innovation in the market.
Are Damaged Goods and Obsolete Goods the same?
Damaged goods are those that have lost value because of a defect and hence cannot be sold at the market value. While in some cases damaged goods can be sold at a discounted price, in most cases they turn into dead stock that becomes obsolete inventory.