What is Obsolete Inventory? Definition and Ways to Avoid
23 Mar 2021
Obsolete inventory management is one of the hardest things to do in retail. It’s also known as “obsolete stock,” “dead inventory,” or “excess inventory.” Any business can deal with cases of inventory obsolescence as the times’ change and customer demand changes at the same time.
The causes of obsolete inventory may vary. One of the main reasons could be an overall decline in demand for the goods you produce. Another reason could be the intense competition in the industry, where you cannot just catch up with your competitors.
Whatever the reason is for your obsolete stock or deadstock in your warehouses, you should be quick to get rid of it. This is because it will affect your business profitability hugely. Sometimes having no stock at all would be a better option than keeping it on your shelves for a long time.
With the help of this article, we will figure out what is obsolete inventory and how to avoid it. We will discuss the causes of obsolete inventory as well.
Obsolete Inventory Definition
Obsolete inventory, also known as deadstock, refers to the inventory at the end of its product life cycle. This type of inventory usually processes through several stages of inventory levels before becoming obsolete.
Here they are:
- Healthy – also know as cycle stock. The type of inventory, which is prepared to sell. Demand forecasting helps to have a better idea of how to plan to sell your inventory.
- Slow-moving —stays in stock for more than three months without the usage
- Excess — in stock for more than six months
- Obsolete —in stock for more than one year
In the past, the companies used to hold their inventory for too long. But now, as the customer demand changes more frequently, the product life cycle became shorter at the same time. Customers’ higher expectations, poor stock management and many other factors cause inventory obsolescence.
When you cannot sell your inventory for a long time, it starts losing its value in the market. In this case, the companies should recognize the fall in value and either write-down or write-off as of the generally accepted accounting principles (GAAP) rules.
- You can apply a “write-down” when the market value of the inventory falls below the cost recorded on the financial statements.
- In case of a “write-off,” the companies take off the whole inventory from the financial statements. This is the case when your inventory is identified to have no value at all, and there are not any chances to sell it.
Causes of Excess and Obsolete Inventory
Let’s now discuss each of the causes for excess inventory and later figure out the methods you can apply to avoid it.
This is one of the most wide-spread causes, which may result in inventory obsolescence. Incorrect forecasting of customer demand most of the times makes the businesses order more stock than needed. As a result, the businesses hold on with it. They proceed with that excess inventory on hand only after selling a small portion of it.
To avoid it, you should improve your stock control regularly. In that way, you’ll have at least an update of what’s going on with your inventory.
Bad Inventory Management
Accurate Inventory management is the key to success. Unorganised inventory management leads to poor inventory tracking and ordering mistakes.
The companies which apply the perpetual inventory system are less likely to have such problems. This system helps to have updated stock information per each sales transaction. The same is true if you start using automated eCommerce business automation for the overall management control. In this way, human impact becomes less.
Poor or unorganised inventory management teams may ignore the slow-moving inventory. That’s the reason why they eventually end up with excess inventory in hand.
Poor Product Quality and Design
Product design nowadays is an essential factor determining a lot. A good product design that meets your customer expectations will bring high sales revenues. If you fail to provide a good product design, there’s a possibility that your competitors will. As a result, product demand declines immediately. Apart from it, your brand’s reputation will be affected negatively.
Ensure you are not shortening your product’s life cycle by not providing a good design, which matters a lot. Regular market researches help to have reasonable quality assurance and updates on product designs.
Obsolete Inventory Management
There are many methods you can apply to handle the excess inventory. The moment you feel you are dealing with a slow-moving inventory, you should take actions. You can give it a try by selling it at a lower price if it’s possible. Apart from trying to sell using strategies such as bundling, discounts, and remarketing.
Let’s discuss each method separately and figure out which one could work the best for you.
Excess Inventory Bundling with Other Products
This is a good method to try getting rid of a possible future excess inventory. You can choose to bundle the slow-moving product together with the best sellers. Most of the customers enjoy buying product bundles, as they are more valuable in terms of having more in a group. Bundling moves the excess inventory out of the doorway much faster.
Sell at a Large Discount or Flash Sale
Offering large discounts is also a good method to get rid of the inventory. Right before offering discounts, you should make obsolete inventory accounting. As you do the maths, you can determine how low you can discount the items. In this way, you can at least cover the Cost of Goods Sold (COGS).
Try using all the advertising platforms, including social media, email marketing and other tools, to market your fresh sales.
Although demand forecasting is good to implement, you should note that not in all cases it works with 100% accuracy. There will always stay some amount of inventory, which you won’t be able to sell. However, it is possible to eliminate these numbers by the minimum amounts.
eSwap as order management software offers the users the best solutions which can help not only avoid inventory obsolescence but have accurate stock management. It’s an automated Saas software that gives stock updates, purchase order management and many other solutions all from one dashboard.
eSwap offers multiple software features like workflow automation and many others to reduce manual tasks and reduce inaccuracy. In this way, you will have enhanced product visibility, thus avoid having excess inventory at the same time.