What Is Obsolete Inventory?

Introduction to Obsolete Inventory

It’s easy to define obsolete inventory. Simply put, it is inventory that is at the end of its product life cycle. The product has not been sold, and the business no longer expects it to be sold in a future state. It is simply there, taking up space. One of the reasons obsolete inventory is becoming a greater challenge for businesses is the product life cycle has become much shorter.

Customers expect to have and use their products rapidly. Inventory can now become obsolete much faster. Inventory can also become obsolete through a slower, more gradual process, with sales simply drying up over time, demand going down, and eventually obsolescence.

Is Inventory Obsolescence A Major Problem?

In a word, yes. Obsolete stock can have a number of serious consequences that can negatively impact the financial health of your business.

Having obsolete inventory on hand also requires you to set up an inventory reserve for obsolescence in order to ensure you have accurate books because your inventory is now worth less than its stated book value.

Obsolete inventory also ties up capital and takes up valuable space in your warehouses that could be used for salable inventory. Furthermore, obsolete inventory must still be organized, managed, and audited. This takes up additional effort that is wasted on inventory that you cannot use. Obsolete stock still requires you to pay for all the inventory carrying costs that you would with salable inventory. This means additional financial losses for your company.

Top 3 Causes of Stock Obsolescence

Obsolescence of inventory can occur for a variety of reasons. Below, we go over 3 of the most common causes of this problem.

Inaccurate Forecasting

In order to maintain healthy inventory levels, you need to be able to accurately predict demand for the products you are purchasing. When your forecasting is accurate, you only buy what you need, minimizing your carrying costs while ensuring that you don’t run out of stock when demand is high. When your forecasting is inaccurate, you may purchase too little stock, leading to an inability to meet demand. On the other hand, you may over-predict demand and buy too much inventory, leading to obsolescence.

Poor Inventory Counting and Management

Even with the best demand forecasting, you need to know how much product you currently have in stock and how much you need to purchase. This is what inventory counting is all about. Good inventory management ensures that you have the data and information you need to make accurate decisions. Efficient inventory management means reduced carrying costs, more accurate purchasing, and less obsolete inventory.

Market Changes – A Product Flop

Sometimes, a product may seem like a good idea in the boardroom but then fails to perform when exposed to your target market. This can occur for a variety of reasons. The modern economy is governed by highly dynamic, rapidly changing consumer preferences, and no business gets it right every single time. On the other hand, a product might flop because of poor market research and inaccurate data. Either way, a product that fails to sell rapidly leads to obsolete inventory challenges.

How To Manage Obsolete Inventory

In order to manage obsolete inventory, you first need to be able to identify obsolete inventory in your stock. The simplest way to do this is to look at your products and identify which items are not selling and look unlikely to ever sell based on that product’s traditional product life cycle. You can then classify these items into obsolete inventory. This can be done by looking at historical sales data. You can also identify obsolete inventory by looking at inventory aging reports. Some inventory wil have explicit expiration dates that you can use to cross-check aging reports and find obsolete inventory.

Once you have identified obsolete inventory, you then need to know what to do with it. You’ve got a number of options, including:

• Obsolete Inventory Write-off – The product is no longer an asset because it can’t be sold. Therefore, it can be written off as a loss on your financial statements, and you can reduce your tax liability.
• Revamp Your Sales Efforts – Consider putting the obsolete products on sale and sell them at a lower price. You could also find a way to reposition the product to focus on a different target market. Conduct a new marketing campaign and see if you can sell those products after all.
• Donate The Items – By donating obsolete products to charity, you can make your organization eligible for a tax deduction amounting to the total cost of those products.
• Bundle Stock Together – You may not be able to sell certain items individually that you can sell collectively. Consider bundling certain products together into packages that you can sell and promote. You could combine obsolescent stock with products that are currently selling well to help increase sales and reduce unsalable product inventory.

Simplify Your Inventory Management With Zupan

Obsolescent inventory is a major problem for any product-based business. One of the best ways to reduce inventory obsolescence is to utilize a powerful inventory management tool like Zupan.

With Zupan, you can always get accurate data on all your inventory whenever you need it. You can scan your inventory and manage it using a single tool, and you can do it with a smartphone, too. If you’re still trying to manage inventory using traditional, paper-based methods, you’re only setting yourself up for more challenges. Instead, use our inventory counting software count your inventory 10x faster and access powerful features like inventory variance analysis to get the accurate reporting you need.