Author: Bea Bonte Jun 17, 2020 4 Min READ

Obsolete Inventory Definition, Causes & How to Avoid It

4 Min READ
Obsolete Inventory Definition, Causes & How to Avoid It

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As you know, inventory refers to the sellable goods your company possesses. It includes current inventory, future inventory, and you manage it as you sell items, ship items, and add new stock to fill the shelves. But, what about inventory that has been in the company’s possession for so long that it can’t sell? This is considered to be obsolete inventory. 

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What is Obsolete Inventory?

Also called excess or dead inventory, obsolete inventory is inventory that has reached the end of its product lifecycle.  When a product is stored in the warehouse for too long, it will inevitably become obsolete inventory. Whether it’s a car, television, or clothing, every product will go through the four stages of a product lifecycle — introduction, growth, maturity, and decline. When a product has matured, it means it’s incredibly profitable due to the cost of production and marketing both being decreased. After this stage, as the market changes and customer 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.

Obsolete is different from slow-moving inventory in a few ways, but mostly due to its reaching a particular timeline. Slow-moving inventory can also continue to be sold after adjusting to price, marketing, and other efforts to get it out the door. A good rule of thumb to differentiate between different types of inventory is that slow-moving inventory has six months of inventory, excess inventory has twelve months of inventory, and obsolete has not been sold or used in 12 months or more. A year seems like a short time, but in terms of the product lifecycle, and changes in the market—things move quickly—and a lot can change in a year.

Causes of Obsolete Inventory

We talked about the product’s lifecycle, which is inevitable for every product, but the time it takes to reach the end can be affected by a few factors. Things that can speed up that product’s lifecycle, which is not necessarily good, include inaccurate forecasting and inadequate production.

Staying on top of industry market trends, customer insights, supply and demand, and other factors can ensure accurate forecasting. Failing to forecast accurately can lead to overbuying a product, pricing too high, or just lacking the marketing strategy needed to target the proper markets. One of the main culprits of slow-moving, excess, and obsolete inventory is buying more than you can sell.

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. All of a sudden, your company is left with heaps of bad products that will never sell, and it jumps straight to the obsolete stage of its lifecycle.

How to Prevent Obsolete Inventory

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. 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 inventory management strategies such as bundling, discounts, and remarketing.

Bundle Excess Inventory with Other Products

Bundling products that are slow-moving with products that are best sellers can be one way to get it moving out the door. For example, if your company sells cleaning products and your top seller is your all-purpose cleaner, but you find yourself with an abundance of scrubbing sponges—make a bundle out of them! Pairing your all-purpose cleaner with a three-pack of sponges not only moves your excess inventory out the door faster but also entices customers to purchase more cleaners since the bundle makes it a great deal.

Sell at a Large Discount or Flash Sale

When a brick and mortar retail store goes out of business, they often throw a going out of business sale. You’ll see signs that say “90% off!” and “Everything must go!” as a last-ditch effort to rid themselves of inventory on-hand before liquidating their assets. The same can be done for excess inventory. Your company can do some math and determine how low you can discount the items to at least break even while also ridding your inventory of the items that have become obsolete. Because any inventory left on hand must be written off as a loss, you can at least sell them to cover the cost of goods sold and not have to take a loss. Using social media platforms, email newsletters, and other forms of free promotion, market your flash sale on the recess inventory to the tune of “everything must go” and hope you can kill two birds with one stone.

Improve Your Inventory Tracking

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. Without thorough and accurate inventory tracking, your company can lose sight of what inventory items need to be tracked, how they are sold, and how many you need to order to replenish inventory.

First, you must have an accurate reorder point to avoid overstocking inventory. To determine your reorder point, you need to know three things: average daily unit sales, average lead time in days, and your safety stock level. We talk about safety stock inventory levels in our previous blog post here. The reorder point tells you when you should order more stock based on these factors. It can be approximated by using this formula: (Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock = Reorder Point.

Appropriately manage obsolete inventory with Extensiv

It can negatively affect a company's profits by having to write off the obsolete inventory as a loss. Thus, it’s essential to know how to avoid obsolete inventory and handle it appropriately. Using Extensiv’s real-time inventory tracking tools, warehouse management systems, and keeping a keen eye on your customer’s needs, you should be in excellent shape to continue moving through inventory at the right pace. We want to help you succeed, and part of that means working together to create a well-oiled machine in your warehouse. Call us at 651.401.8640 (Ext. 1) to get started!

FREE REPORT Time to Expand Your Ecommerce Warehouse Best Practices and Tips for Brands & Merchants  

Obsolete inventory FAQs

How does obsolete inventory affect businesses?

Obsolete items tie up valuable warehouse space and capital, leading to increased storage costs and reduced cash flow. It also impacts profitability due to the inability to sell or repurpose the inventory, leading to potential write-offs and losses. They may also lead to supply chain issues due to warehouse delays and inefficiencies.

How can businesses identify and categorize obsolete inventory?

Businesses can use various metrics like inventory turnover ratios, sales trends, historical data, and shelf-life assessments to identify inventory obsolescence. Categorization involves inventory audits, distinguishing between slow-moving items that might eventually sell and items that are unlikely to ever be sold. Businesses can use inventory management software to track inventory and manage dead stock.

Can obsolete inventory be repurposed or recycled to reduce losses?

You don’t always need to write off obsolete inventory. In some cases, depending on the nature of the inventory, repurposing or recycling might be viable. For instance, parts of obsolete stock might be used for repairs, or raw materials from unsellable goods could be recycled or reused in manufacturing processes for new products to minimize losses and improve profit margins.

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