Having a warehouse full of stock is an inventory management dream — unless that inventory has no chance of selling.
More product doesn’t necessarily lead to more profits, especially for industries where goods might fall out of style. When that happens, it’s considered obsolete: no longer in demand or useful to customers. And obsolete inventory takes up valuable warehouse space while dragging down your revenue.
In this article, we’ll guide you through the strategies and best practices to effectively manage obsolete inventory, turning a potential challenge into a catalyst for growth and success.
Understanding obsolete inventory
In inventory management, obsolete inventory refers to items that are no longer in demand or have lost their usefulness. For example, a tech company could have a warehouse full of older smartphone models that have been surpassed by newer technology. These products have lost their appeal and are unlikely to sell at their original price, if they sell at all.
But obsolete inventory isn’t limited to technology. Any industry where products have a limited shelf life or are susceptible to changing trends is at risk. Perishable goods, seasonal items, and products with planned obsolescence (like new technology or trendy clothes) are all examples.
3 risks associated with obsolete inventory
Obsolete inventory isn’t merely a storage issue. It poses a multifaceted threat to your business’s financial health and operational efficiency. Here are some common risks:
- Storage and carrying costs: Warehousing obsolete inventory comes with a list of ongoing expenses. It takes up space in your storage facility with little promise of earning a profit, which means it’s eating into your rent, utilities, insurance, and security costs. And the longer the inventory sits unsold, the more these costs drain your resources.
- Tied-up capital: The funds invested in obsolete inventory are essentially frozen assets. If that capital were available, you could use it for purchasing in-demand products, investing in growth opportunities, or maintaining safety stock to buffer against unforeseen fluctuations in demand. The inability to free up this cash hinders your company’s financial flexibility and growth potential.
- Operational risks: Obsolete inventory is susceptible to damage, theft, and deterioration, potentially leading to write-offs. Additionally, managing and tracking these items could strain your operational resources and create inefficiencies in your inventory management processes. If workers are always navigating around this stock or reorganizing the warehouse to make sure it’s out of the way, it hinders their ability to fulfill orders promptly. This can lead to increased labor costs and decreased productivity.
Common causes of obsolete inventory
Understanding the root causes of obsolete inventory lets you create prevention strategies. Here are several factors that contribute to the accumulation of unsold or unusable stock:
- Absence of supply chain data: A lack of visibility into your supply chain can lead to overstocking or reorders of items that are no longer in demand. When businesses lack real-time data on inventory levels and sales velocity, they may struggle to make informed decisions about purchasing and production, leading to obsolete inventory.
- Inefficient inventory management: Optimizing inventory levels can be challenging without proper inventory planning — including the tools and technology that help track stock levels in real time. And a poor understanding of what’s actually selling is a common way to end up with excess product and ineffective plans.
- Inaccurate inventory forecasting: Businesses may end up with obsolete inventory when they fail to accurately forecast demand based on historical sales data, market trends, and other factors.
- Lack of inventory transparency: If you don’t have a clear picture of what’s in your warehouse, you’re more likely to accumulate obsolete items. Not only can lack of visibility cause inventory to go unseen (and increase carrying costs), but you also risk stockouts of your high-demand products.
How to avoid and reduce obsolete inventory
Preventing excess inventory is crucial to maintaining a healthy bottom line. By proactively addressing potential issues, businesses can save on storage costs, reduce waste, and ensure optimal use of resources.
1. Determine your optimal reorder point
Finding the sweet spot for reordering is crucial. By calculating the ideal inventory level at which you should replenish stock, you can avoid both stockouts and excess inventory. Consider factors such as lead time, demand variability, and safety stock to set reorder points that align with business needs.
2. Accurately forecast demand
Harnessing the power of data is key to accurate forecasting. Analyze historical sales data, market trends, seasonality, and other relevant factors to predict future demand. By understanding customer behavior and anticipating fluctuations, you make informed reordering decisions, preventing overstocking and minimizing the risk of obsolescence.
3. Track inventory levels in real time
Monitoring stock levels as they fluctuate allows you to identify potential issues as they arise and take corrective action. Whether it’s adjusting reorder points, transferring stock between locations, or implementing promotional strategies to move product faster, real-time tracking empowers you to respond to changes in demand effectively.
4. Conduct regular inventory counts
You can’t determine which products are at risk of obsolescence if you aren’t confident in what you have in stock. Take the time to conduct regular analyses of your products, from a standard inventory count to an ABC analysis, to make sure that your records are accurate. From there, you can figure out what’s not selling and deal with it sooner rather than later.
5. Use inventory management software to maintain visibility
Real-time visibility into your stock levels is essential. Implement a robust inventory management system to track stock levels across every location where goods are stored. With accurate, up-to-date information readily available, you can optimize inventory allocation, ensure product availability, and avoid overstock situations that can lead to obsolescence.
Fishbowl’s cloud-based inventory solution offers a range of features designed to prevent and reduce obsolete stock, including automated reorder points, real-time inventory tracking, customizable reports, and seamless integration with other business systems. By leveraging Fishbowl’s capabilities, you can gain valuable insights into how products perform to make data-driven decisions that minimize the risk of obsolescence.
How to identify and manage obsolete inventory
If you found this article too late and think you already have obsolete goods on your hands, don’t worry — there are several strategies you can use to identify what’s truly a lost cause, then get rid of it.
1. Sell items at a discount
Offer clearance sales or promotions to move excess stock, like a markdown on products from last season that have low demand. This can help recoup some of your investment and free up valuable storage space.
2. Consider an inventory write-down
If the market value of a product has declined, consider a write-down to reflect the newer, lower value. You’ll recognize this adjustment as a loss, adjusting the value on your balance sheet.
3. Write off obsolete inventory
If items have no remaining value, remove them from your inventory records entirely. This is known as a write-off and is often used for items that are damaged, expired, or otherwise unsalvageable.
4. Rebrand and resell items
In some cases, you may be able to repackage or remarket obsolete products to appeal to a different audience. This could involve kitting them with other items, offering them as part of a promotion, or finding new sales channels. Kitting moves more inventory while increasing the perceived value of the sale.
5. Donate obsolete inventory
Donating to charitable organizations can be a tax-deductible way to dispose of unwanted items while also giving back to the community.
Accounting for expired inventory
Another risk of obsolete inventory is how it impacts a company’s financial statements. According to Generally Accepted Accounting Principles (GAAP), it must be written down or written off, reducing its value on the balance sheet and recognizing a loss on the income statement. This loss can significantly decrease net income and profitability while affecting key financial ratios, such as your inventory turnover ratio.
For example, if a company identifies $5,000 worth of expired inventory that can only be sold for $1,000, it must write down the goods by $4,000. This write-down is recorded as an expense, reducing net income. The inventory’s value on the balance sheet is also reduced to its net realizable value ($1,000 in this case). This adjustment reflects the product’s true economic value and ensures the financial statements provide an accurate picture of the company’s financial health.
Say goodbye to obsolete inventory with Fishbowl
Tired of obsolete inventory draining your resources and hindering your growth? Fishbowl’s inventory management software empowers you to take control. With real-time tracking across all channels, accurate demand forecasting, and automated reordering, Fishbowl helps you make data-driven decisions that keep stock at optimal levels and minimize obsolescence.
Don’t let outdated goods hold your business back. Discover how Fishbowl can revolutionize your inventory management and boost your bottom line today.
