When inventory can’t be sold in the markets, it declines significantly in value and could be deemed useless to the company. Since GAAP mandates immediate recognition of any obsolescence as soon as it is detected, you may have a struggle enforcing immediate recognition over the objections of management. You can improperly alter a company’s reported financial results by altering the timing of the actual dispositions. Though obsolete inventory can still impact ideal profit margins, putting items on sale can help replenish some of the costs by attracting bargain shoppers. Inventory obsolescence occurs when a company determines that certain products can no longer be used or sold because demand is so low.

Proper management and accounting for such inventory is critical, as it directly affects a company’s profitability and balance sheet. Without proper inventory planning — including the tools and technology to help track inventory in real time — optimising inventory levels can be a challenge. SMED significantly reduces manufacturing costs by minimizing downtime, excess inventory, and waste. Reduced setup times translate to more productive hours, while lower inventory levels decrease storage expenses and obsolescence risks. This efficiency directly impacts the bottom line, making SMED a crucial tool for cost-conscious manufacturers. Using inventory management systems allows businesses to effectively track and manage their stock in real-time, providing updated metrics that can highlight slow movers.

It ties up valuable resources, takes up precious warehouse space , and puts a damper on profit margins. But don’t worry; we’re here to help you tackle this issue head-on with these six effective strategies to rid your business of obsolete inventory. For many brands, tracking and managing physical inventory levels is the most important thing and has the biggest impact on the bottom line. When inventory starts to sell slowly—or stops selling at all—a brand needs to take notice and start making changes.

How to cut inventory costs efficiently

SMED is a set of techniques designed to reduce equipment setup and changeover times to under 10 minutes, operating within the “single-minute” range. Obsolete stock represented 10.7% of the total inventory in one example, with a total cost of $4,450. By examining these cases, businesses can learn how to better manage and move slow-moving inventory. Proactive interaction among supply chain partners allows swift reactions to customer demand shifts. Effective communication ensures alignment and proactive responses to these changes. Effectively managing slow-moving inventory is critical to freeing up capital and enhancing overall business performance.

Obsolete inventory refers to stock that has seen no demand for a prolonged period of time, e.g. it has not been sold to customers or used in production. Obsolete stock is often a financial burden to businesses, as it usually has to be sold at a loss or simply written off at the end of a financial year. The most effective way is to analyze your sales data, showing you which products take the longest to sell (or don’t sell at all). Products with high storage, insurance, and other carrying costs can significantly impact your profitability.

Ecommerce merchants can now leverage ShipBob’s WMS (the same one that powers ShipBob’s global fulfilment network) to streamline in-house inventory management and fulfilment. Though there are several ways to help avoid accumulating obsolete inventory, carrying any type of dead stock is inevitable. Here is what to do if you end up carrying inventory that has become unsellable. By implementing an inventory tracking system, you can get a closer look at inventory days on hand, sales, and buying trends. This way, you have the insights needed to make better decisions on when to repurchase more inventory (or even discontinue an item). This includes having insights into production lead times, labour needs, warehousing, order fulfilment, and shipping.

Any inventory that cannot be sold needs to be written off as an expense at the end of the fiscal year. Below, we’ll look at an obsolete inventory definition, the causes of obsolete inventory, and strategies for managing it. This means you’ll always know what you’ve got in stock and where it is, even if you stock inventory across multiple locations. This should help your team order confidently, practice tighter inventory control, and quickly estimate the value of inventory you have on hand.

How to detect, prevent, and reduce obsolete inventory?

Manufacturing companies understand this all too well, as they must keep track of the inventory in their warehouses. By choosing a more accurate way to predict demand, you could save your business time, stress, and money. These industries are at high risk of obsolescence because demand for them is often seasonal and/or trend based. Next to inadequate stock levels, inventory losing its value is a key concern among companies.

• Setting specific inventory turnover goals can also aid in recognizing slow-moving inventory across different product categories.
• When the market shifts, it can leave certain products behind, making them slow movers.
• Plus, visual inventory systems like Sortly allow you to see what you have on hand—an extra helpful tool when determining whether certain items are at risk of becoming obsolete.
• Adjusting pricing strategies, including discounts and promotions, effectively helps move slow inventory.

New market entrants, economic recessions, and changes in consumer preferences can all contribute to slow sales. By partnering with diverse retailers, businesses can enhance exposure for slow-moving items. Inventory management systems automate inventory metrics tracking and send alerts when levels reach critical points. This software helps prevent mistakes by allowing for small adjustments to avoid significant issues. A final source of information is the preceding period’s obsolete inventory report.

Identifying and Classifying Obsolete Inventory

• If a company receives materials too late to capitalize on a trend, the finished products might well miss their market window.
• If a product doesn’t live up to their expectations, they won’t return to buy more of the product and may even write poor reviews that will keep others from purchasing the product.
• It lowers overall inventory costs and the losses that come with writing-off this stock.
• At some point, usually during an end-of-year inventory audit, a business will realize that some inventory on their shelves will only sell at a discount—or has no value at all.
• 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.

Suppliers may inform you of upcoming product discontinuations or changes that could impact your inventory. Similarly, customers may provide feedback about their changing preferences or concerns about product quality, indicating potential obsolescence risks. If you manufacture or assemble products, reviewing engineering change orders (ECOs) can be a valuable tool for identifying obsolete inventory. These changes may render existing inventory obsolete, requiring you to take appropriate action to avoid holding unnecessary stock. Alternatively, getting rid of obsolete inventory will reduce expenses, minimize losses, and improve company cash flow.

How can inventory management software alleviate obsolescence risk?

Alternatively, you can try product bundling obsolete items with a fast-selling item (and even offer free shipping). SMED meticulously streamlines workflows, purging non-essential activities like tool searches or idle waiting periods. This focus on eliminating waste and unnecessary movement enhances operational efficiency and reduces cycle times, aligning perfectly with Lean’s core principle of maximizing value while minimizing waste. For instance, pre-positioning tools and materials adjacent to the machine eliminates wasted motion.

These items have typically been replaced in the marketplace by more advanced or inexpensive goods, so there is no longer any demand for them. Since these goods cannot be used, their cost is either written off or written down. A write off completely eliminates the inventory asset from the accounting records, while a write down reduces the amount of the recorded asset to the price at which it can still be sold. Market externalities and supply chain fluctuations can also lead to inventory obsolescence, often in difficult-to-predict or control ways.

Obsolete inventory can have significant negative impacts on a business, including tying up capital, occupying storage space, and decreasing profitability. Supplier and customer feedback can also play a significant role in identifying obsolete inventory. Engaging with suppliers can provide insights into upcoming market trends and technological advancements that may render current stock obsolete. Similarly, customer feedback can highlight changing preferences and emerging needs, enabling businesses to adjust their inventory strategies accordingly. Regularly soliciting feedback through surveys, focus groups, or direct communication can offer valuable perspectives that might not be evident through data analysis alone.

A new brand with a better price or better marketing may be enough to disrupt your market. With so many options for consumers, it’s easy for them to shift away from your product, even if it still meets their needs. For brands looking to improve inventory visibility and tracking within their own warehouses, look no further than ShipBob’s warehouse management system (WMS). Obsolete inventory is any inventory that a company can no longer sell or use due to lack of demand. This mostly occurs when goods reach the end of their product life cycle or in cases of sudden sales disruptions or demand forecasting mistakes. Obsolescence can also result from poor inventory management, such as when inventory items are forgotten, damaged, or expire before they’re sold or used.

This metric is crucial for businesses to monitor, as it can provide early warnings about inventory that may soon become obsolete. Inventory is generally considered obsolete if it can no longer be sold or used in production due to factors like expired shelf life, market changes, restricting regulations, zero demand, etc. Regular inventory audits, analysis of sales trends, and monitoring product life cycles can help determine when items are becoming obsolete and should be addressed. 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 what is inventory obsolescence system that continuously updates inventory records as transactions occur.