Managing Obsolescence Costs in Modern Inventory Systems

When detected, obsolete inventory must be marked as either a write-off or a write-down. A write-off is when stock is eliminated from the books altogether due to losing all realizable value. Not only can a lack of visibility cause obsolete inventory to go unseen (and therefore increase carrying costs), you also risk stockouts of your high-demand products. Obsolete inventory is an item or items that a business can no longer sell. They may have been replaced in the marketplace by an improved or less expensive product or model. Businesses are consequently forced to write off or write down their value or cost in their accounting records.

Even if the forecasts are balanced, poorly managed procurement often fails to align purchasing decisions with actual market demand. Inventory can pile up when companies overstock goods tempted by bulk discounts or gut feeling. This, in turn, ties up valuable capital, drives up holding costs, and increases obsolescence risk. Having robust inventory management softwarecan help you track inventory, predict future selling trends, and identify slow-moving items before you put in your next repurchasing order.

Real-World example: Race Winning Brands cuts €3.5 million from excess stock

Finding the right system can help your business avoid carrying obsolete stock. Technological advancements are reshaping the landscape of inventory management, offering new ways to tackle obsolescence costs. Artificial intelligence (AI) and machine learning (ML) are at the forefront of this transformation, providing predictive analytics that can forecast obsolescence trends with remarkable accuracy. For example, AI-driven platforms like IBM Watson can analyze vast amounts of data to identify patterns and predict when certain products are likely to become obsolete.

• Thus, while you can calculate the optimum parameters for each and every item, it is currently somewhat difficult and laborious to do so with a reasonable degree of accuracy for all items.
• In this case, your excess stock can be written off as a loss on your financial statements.
• Obsolescence is to be avoided as it can have a significant financial impact on businesses, particularly those managing complex multi-location inventories.
• Regular audits help spot potential issues early and allow you to adjust your stock levels before it’s too late.

Tech Advancements and Obsolescence Costs

In the first example, the graph indicates a decreasing demand/usage and the “Months on Hand” at 10 months. A close watch on Item AB123 each month may determine an increase in inventory may create an excessive amount. Until there is a clear understanding of the market and production, it would make sense put further purchases on hold. If a competitor offers a higher quality or more affordable product, you can bet that most customers will stop purchasing from one company and turn to the more appealing option. This can leave a small business with obsolete products that are unsellable.

Seasonal or themed sales events can also attract customers and help you move excess stock at a reduced price. Consider rebranding or repackaging products to make them more appealing to customers. You can also target new customer segments by exploring niche markets or demographics that may have been previously overlooked. Limited-time promotions, such as special offers or discounts, can also help generate interest and encourage sales of slow-moving items. Understanding the causes of obsolete inventory is the first step in mitigating its impact. By being proactive, businesses can adjust their strategies, ensuring their inventory remains fresh, relevant, and in line with market demands.

Beyond this, especially where you are coordinating inventories across multiple facilities, visibility is also critical. “Blind spots” or inadequate coordination can lead to shortages or excesses when considering the network as a whole. Implement these strategies to effectively clear out obsolete inventory, streamline your warehouse operations, and ultimately improve your bottom line.

Small-business owners should do everything they can to avoid high levels of obsolete inventory. Not only does too much excess inventory cut into profit margins and cash flow, but it can also limit the chances of getting a business loan. Efficient inventory management systems provide end-to-end traceability through leveraging barcode scanning, real-time job reporting, etc., allowing businesses to track every item from procurement to sale. The software is based on a perpetual inventory system that continuously updates inventory records as transactions occur. This is essential for identifying slow-moving items early on and enabling taking prompt action.

Insights

But sensitivity to product lifecycles and basic communication is sufficient to avoid the worst E&O effects in this area. Along with shortages, excess and obsolete (E&O) inventory is a good indicator of how well your supply chain is performing. Some waste is inevitable in most supply chains, since demand is unpredictable and shelf life is not infinite. But organisations can do a lot to minimise E&O, with both financial and environmental benefits. Finally, consider donating excess stock to charitable organizations or community outreach programs. Not only will you be doing good for the community, but you may also be eligible for tax deductions on your charitable contributions.

Obsolete Inventory: How to Prevent and Manage Excess Stock Before It Hurts Your Bottom Line

Sudden changes in consumer preferences, economic downturns, or the introduction of new technology can render existing products obsolete almost overnight. Accumulating too much obsolete inventory can be bad for business since it cuts into profit margins. Inventory is considered an asset since it’s purchased with the intent to sell.

This is good in principle, but there are currently a number of challenges with applying it in practice. Firstly, there is the computational challenge – permutations drive effort exponentially. MEIO is highly dependent on a number of parameters like waiting times, which are normally hard to quantify accurately. Finally, and perhaps most importantly, there are challenges with implementation. To obsolete inventory realise the benefits of MEIO, you need a differentiated range of service levels. You might want one location to deliver a service level of 50% for one item, another 80%, a third 98%.

If that’s the case, you can avoid over-ordering by buying less inventory more often rather than purchasing inventory for an entire year.