Obsolete Inventory: The Unmoving Hazard for Inventory and Supply Chain Management
Even at the best of times, managing inventory has been a challenge for nearly every industry. Having too little inventory means a seller could miss opportunities to make a sale as you can’t sell from an empty shelf. On the other hand, having too much inventory can tie up working capital and cash flow, which can effectively hamstring a company until the excess stock has been sold. There’s also the consideration of where to store inventory. As we’ve discussed earlier, warehouse space is at an absolute premium, and that’s if there’s any to be found. Managing and storing extra stock is less than ideal given the current market environment.
These are all challenges that every retailer and e-tailer needs to navigate and work with, especially given the volatile nature of the global supply chain presently. One means of dealing with the inevitable shipping delays is to manage a safety stock that can serve as a buffer when capacity runs scarce. However, a risk arises from carrying too much inventory for too long; it becomes obsolete.
Holding on to obsolete inventory can be incredibly detrimental and costly for companies and is a growing risk in the current market. We will look at identifying, reducing, and ultimately managing obsolete inventory to help businesses be more profitable and efficient.
What is obsolete inventory?
Obsolete inventory is a product that has reached the end of its life cycle due to a lack of value and demand, making it unsellable. This can happen for many different reasons, but the most common are consumer tastes/preferences and outdated technology. Other reasons for inventory falling out of vogue include:
Increased competition increases pressure to offer newer and better products
Drops in demand to shifting market trends
New technology disrupts the manufacturing process (i.e., newer models are improved)
Innovations that improve on functionality make old models inconvenient or unattractive
The dangers of obsolete inventory
When inventory becomes obsolete, it is no longer considered an asset since it can no longer be sold for profit. According to GAAP (Generally Accepted Accounting Principles), inventory must be reported as a write-off at the end of the current fiscal year. Given the increasing rate at which new technologies are being developed and released and the interconnected world of social media, product life cycles are becoming increasingly shorter-lived, which raises the risk of obsolete inventory.
Obsolete inventory can be accumulated for a number of reasons. While this is by no means a comprehensive list, here are some of the most common reasons and how to avoid them.
Inaccurate inventory forecasting: inaccurate inventory forecasting leads to ordering a higher amount of inventory than the actual demand. Of course, inventory forecasting isn’t an exact science, but it can be made even more complicated when there aren’t enough market insights or established historical data to base decisions on.
Solution: To avoid overbuying, purchasing less inventory on a more frequent basis can help to keep inventory levels lower and more manageable.
Poor inventory management: Companies that lack proper inventory planning tools and technology run a higher risk of obsolete inventory. Strong inventory management can help identify which products are slow to sell and risk becoming obsolete.
Solution: Employ an inventory management solution to provide insights into current inventory and identify present on-hand and turnover rates more readily.
Lack of inventory transparency: This issue goes hand-in-hand with poor inventory management. A lack of visibility increases the risk of obsolete inventory and the risk of stockouts for high-demand items.
Solution: Similar to improving inventory management, a visibility software solution can improve inventory control and, as an added bonus, can help optimize inventory and improve forecasting.
Poor supply chain data: The supply chain is the backbone of every business that deals with physical products. Understanding how your supply chain operates and the connection between various links such as suppliers, manufacturers, and the end customer is vital to building a seamless operation.
Solution: Collect and analyze supply chain data to develop sharper insights into day-to-day operations. High levels of visibility into the supply chain increase opportunities to improve efficiency throughout the entire business, including reducing chances for obsolete inventory.
What to do about obsolete inventory?
When it comes to what to do with inventory that has become obsolete, a few options aren’t a complete loss. Flash sales can be an excellent means of shedding extra inventory while still getting something for it. Alternatively, you can bundle items and offer additional perks for customers, such as free shipping. If possible, rebranding items or changing the target audience can be an excellent strategy to move obsolete stock for full retail value. However, this requires additional marketing, so the increased risk is potentially for little reward. If all else fails, writing off the inventory as a loss can reduce tax liabilities, in which case the inventory can be disposed of in whatever suitable means.
Of course, the best option of all is to avoid obsolete inventory in the first place. In the case of e-commerce, ShipWorks provides comprehensive, scalable software for warehouses and high-volume e-commerce merchants looking to unlock efficiency, manage costs, automate processes, and ship smarter.