Developed inventory management policy and strategies to prevent obsolete inventory were resulted in a 50% reduction in obsolete inventory within the first 40 weeks of project initiation. Without proper inventory planning — including the tools and technology to help track inventory in real time — optimizing inventory levels can be a challenge. Obsolete inventory is any excess products or stock a small business has and doesn’t expect will sell, usually due to lack of demand.
- Using this data, Tracey Smith from Numerical Insights LLC provided the owners with information on which inventory was “dead,” the rates at which every item sold, and the number of days of inventory in stock for all items.
- A best practice at one company is to establish during the design phase the life cycle cost for components, and define the total life cycle cost of having ANYTHING in inventory over the life of the product.
- That way you can clearly illustrate when a reduction in revenue is actually a good thing (because that inventory is being sold into primary channels instead).
- Of course, the actual reasons for large lot sizes would have to be investigated by a Lean Six Sigma improvement team.
- This is more urgent for short-dated or distressed inventory than for obsolete goods, but still important in both cases.
Our strategy is to take a few easy measures to avoid the problem from arising in the first place. Data-driven purchasing should be tightly linked to forecasting and demand planning. When it isn’t, and the purchasing team is making decisions based on hearsay or other incorrect information, challenges emerge. Deal-hungry purchasing managers who want to buy things in bulk to save money per item may end up with an excess of stuff on their hands. Revenue is the amount of money that your discounting program brings in the door. It’s the sum total of your discounted sales activities and the culmination of your sell through and sold cost recovery rates.
How to Identify Obsolete Inventory
In the past, if the inventory was held for too long, the goods may have reached the end of their product life and become obsolete. Currently, with technology, the state of abundance, and customers’ high expectations, the product life cycle has become shorter and inventory becomes obsolete much faster. This inventory has not been sold or used for a long period of time and is not expected to be sold in the future. https://personal-accounting.org/ten-ways-to-deal-with-excess-inventory/ This type of inventory has to be written-down or written-off and can cause large losses for a company. A planning process in the design stage can also help to build in the cost of inventory early on. A best practice at one company is to establish during the design phase the life cycle cost for components, and define the total life cycle cost of having ANYTHING in inventory over the life of the product.
- Be sure to look at a range of results, not just one closeout event, to make sure you’re accurately seeing the average performance and not basing your benchmarks on an outlier.
- Be aware of the tax implications and consider the financial impact on your business before making this decision.
- Managing inventory levels to avoid excess and obsolete inventory is crucial for effective inventory management.
- The software can sound the alarm for buyers to reorder items yet supply chain personnel must be vigilant in monitoring any unexpected surge or decline in sales of a specific item.
- A small business that has a great deal of obsolete inventory should reevaluate their inventory management systems, forecasting, and the quality of their products.
During tax season, this is also a time when people begin to look over their balance sheets, and start to question how they ended up with so much slow moving or junk inventory that must be written off. For example, below, for a family of items, we can see week by week the evolution of risks, gradually reduced from more than $1.1M to less than $500k in 26 weeks. There is no doubt for this company, which uses Intuiflow, that the E&O provisions will decrease at the end of the fiscal year, which will improve the P&L…. With your new found commitment to supply chain analytics, you commit to creating an inventory and product demand dashboard to keep these important numbers in front of you at all times. Check out our inventory management dashboard for small and medium-sized businesses.
Obsolete stock is therefore held as working capital on a company’s balance sheet, with little prospect of a return on investment. Obsolete stock, as seen in the infographics below, is inventory that has reached the end of its falling life cycle stage. Because revenue is – at its core – a result of both sell through rate and sold cost recovery, you can improve it by improving either (or both) of those metrics.
Whether you have questions about the cosmetic or beauty supply chain, the food and beverage supply chain, or any other business operations, you can get in touch with a fulfillment logistics consultant today. Another effective strategy to reduce and avoid obsolete inventory is diversifying product offerings and strengthening supplier relationships. By offering a wide range of products, businesses can cater to various customer needs and minimize reliance on a single product line. Collaborating closely with suppliers can also help businesses react faster to market changes and adjust orders accordingly.
Obsolete inventory FAQ
When that happens, the company has to account for the lost value represented by inventory that must be sold at a loss or discarded. How that accounting takes place depends on whether it has any residual value or has to be written off entirely. Ecommerce merchants can now leverage ShipBob’s WMS (the same one that powers ShipBob’s global fulfillment network) to streamline in-house inventory management and fulfillment. With real-time, location-specific inventory visibility, intelligent cycle counts, and built-in checks and balances, your team can improve inventory accuracy without sacrificing operational efficiency.
OmniFlow Software
At least setting a planned number makes sense and can enable a category strategy around that target to be established. The company policy is to record the inventory obsolete of 5% at the end of the accounting period. By managing your inventory across all echelons, or locations you’ll quickly remove surplus stock from your supply chain and the risk of obsolete items appearing on warehouse shelves.
How to Reduce & Avoid Obsolete Inventory
Likewise, inventory audits can help companies get a better idea of their holding costs, which in turn can reduce inventory obsolescence. Effective management of excess and obsolete inventory is a pivotal step toward increasing revenue. Through real-time inventory tracking, informed purchasing decisions, and eliminating obsolete inventory, businesses can optimize stock levels and free up capital tied up in slow-moving stock. These strategies can help you manage excess and obsolescence inventory, streamline supply chain operations, and reduce costs.
Neither you nor your team was looking at the demand numbers and the decreasing patterns. Every product has a life cycle and you keep ending up with excess inventory every time you come to the end of production for a product. If no-one on your team is mathematical, it may be worth it to obtain analytical expertise outside of your company. This guide aids in proactively identifying, accounting for, and addressing the disposition of excess and obsolete inventory. It also assigns accountability for continuous improvement activities focused on mitigating excess and obsolete inventory occurrences by pinpointing and tackling their root causes. Inventory management can be a tricky part of owning a business, and eventually everyone makes a mistake and miscalculates customer demand.
The journal entry removes the value of the obsolete inventory both from the allowance for obsolete inventory account and from the inventory account itself. NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. If you are struggling to manage your excess or outdated inventory, Hopewell Logistics can provide reliable supply chain management solutions. ERP inventory systems use various data sources to provide valuable insights into the performance history of different SKUs, ensuring that employees have the most up-to-date information to make informed decisions.