Obsolete inventory definition

Slow-moving inventory still has some value but sells at a much lower rate than is optimal. Obsolete inventory has reached the end of its product lifecycle, that is to say, it hasn’t been sold or used in a long time and is unlikely to be in the future. Inventory write-off is when a company formally acknowledges the products have lost all value and are now unsellable. In the first example, the graph indicates a decreasing demand/usage and the “Months on Hand” at 10 months. A close watch on Item AB123 each month may determine an increase in inventory may create an excessive amount.

• It will help you figure out how much you’re paying to keep slow-moving products that are on the verge of becoming obsolete.
• Inventory analysis is the process of examining and evaluating various aspects of a company’s inventory to gain insights and make informed decisions.
• Best of all, the company is now covering its costs and has avoided a write-off altogether.
• Not only can a lack of visibility cause obsolete inventory to go unseen (and therefore increase carrying costs), you also risk stockouts of your high-demand products.
• In some cases, inventory may become obsolete, spoil, become damaged, or be stolen or lost.

Businesses may end up with obsolete inventory when they fail to accurately forecast demand based on historical sales data, market trends, and other factors. Obsolete inventory refers to a product that has reached the end of its lifecycle. It happens when a business considers it to be no longer sellable or usable and most likely will not sell in the future due to a lack of 7 main types of business activities carried out by organizations market value and demand. Usually, inventory items become obsolete stock after a certain time period has passed and after they reach the end of their lifecycle. New inventory, like the latest phone model or a must-have dress, will sell quickly and command a high price. Adjusting the price or offering a discount can help avoid obsolete inventory and keep products moving.

Inventory Control System vs. Inventory Management System

Finally, consider donating excess stock to charitable organizations or community outreach programs. Not only will you be doing good for the community, but you may also be eligible for tax deductions on your charitable contributions. Donating excess inventory can help clear space in your warehouse and bolster your company’s reputation as a socially responsible business. Small-business owners can identify obsolete inventory by calculating the number of months a product has been on hand. Obsolete inventory must be written off as an expense at the end of the fiscal year, but business owners should see this as a last resort. Instead, obsolete inventory can be remarketed, sold as a discount, or donated to charity.

You can figure out how much demand there will be for each SKU by looking at data from the past and making smart decisions. In addition, you must not buy too many products that will be out of date before they can be sold. People who access supply chain data can use that information to improve supply chain efficiency. It can be hard to determine how many products you need to refill when you don’t know how many products you have.

What Is Obsolete Inventory?

A company reviewing inventory factors/parameters of thousands of SKU’s manually can be extremely cumbersome. In many cases, time restrictions can leave these system calculations incomplete and inaccurate. If your company manufactures products that are no longer legal or compliant with the law, it will be challenging to sell them. The world is always changing, and other companies are coming out with newer, better versions of the same product.

Although companies emphasize maintaining safety stock levels, sometimes a lack of management, assessment, or audits can make this inventory obsolete. Maintaining optimal inventory levels by closely monitoring the sales pattern and replenishing it as and when required can help reduce the probability of obsolete inventory creation. Another contributing factor to obsolete inventory is the lack of effective inventory management measures. Today, tools and software have replaced the manual calculation of inventory status, marking a departure from conventional practices. These tools are specially designed to automate the inventory management process and provide a comprehensive overview of the inventory status. A company that fails to implement these technologies and tools for obsolete inventory management may face higher losses.

How to Reduce & Avoid Obsolete Inventory

Consumers have increasingly high demands when it comes to product quality. 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. “We have access to live inventory management, knowing exactly how many units we have in Texas vs. Chicago vs. New York. There’s also the option of remarketing items that are at risk of becoming obsolete. With more visibility, you can find ways to optimize inventory to meet demand and avoid common inventory issues, such as overstocking. Known as obsolete inventory, holding on to purchased inventory that is no longer sellable can significantly harm your bottom line.

Periodic checks on your inventory can help identify slow-moving or excess items, enabling you to take timely action to prevent obsolescence. By closely monitoring stock levels, businesses can identify patterns and trends that may contribute to inventory buildup, leading to more strategic inventory management decisions. Additionally, regular analysis can help improve inventory turnover ratios and ensure that you’re meeting customer demand without overstocking products. Examples of expense accounts include cost of goods sold, inventory obsolescence accounts, and loss on inventory write-down. A contra asset account may include an allowance for obsolete inventory and an obsolete inventory reserve.

Reasons to avoid obsolete inventory

At the same time, the company knows that some of the inventory will not be sold and go obsolete. Management estimates the obsolete inventory base on the historical data and nature of product. The main problem with the obsolete inventory percentage is figuring out which inventory to include in the numerator, since it can be difficult to define “recent” https://online-accounting.net/ usage. Whatever method is chosen to define “recent” usage should be applied in a consistent manner, so that trends in the percentage can be more reliably tracked over time. 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.

For example, there are companies in the aerospace industry that do a good business by inventorying seldom used parts. These parts can sell at premium prices as only certified parts can be used on aircraft. In each situation, look at the cost of retaining the excess or obsolete inventory. Regardless of seasonality, the analysis of the trend reports is the critical activity to identify slow-moving inventory, before it crosses the line and becomes hard-to-move excess inventory. Showing the usage/sales data in a graph will aid with the trend analysis. Obsolete inventory must be identified, so that management understands how much of its inventory investment is worthless.

This is usually done when a product has become so outdated that it has no value left or is a net negative for the company. By choosing a more accurate way to predict demand, you could save your business time, stress, and money. Most business owners know that too much inventory on hand is a losing proposition, especially if that inventory has a low inventory turnover rate. And when a company’s inventory sits on shelves for too long, it can waste costly storage space and ties up cash that could’ve been better spent elsewhere.

Therefore, having data about how well their supply chain is working is good for them. To ensure that a business runs and grows, supply chain prediction involves using research and data. It also includes knowing how long it will take to make the product, how much labor it will take, and so on. A lack of visibility can allow obsolete inventory to go unnoticed and lead to high-demand goods’ stockouts. With a large size of inventory, company will be facing high inventory cost as well. The company will try its best to minimize the inventory obsolete cost as it is the cost that does not provide any benefit to the customers or company.

Inventory Write-Off FAQs

An advanced version of the “last used” report compares total inventory withdrawals to the amount on hand, which by itself may be sufficient information to conduct an obsolescence review. It also lists planned usage, which calls for information from a material requirements planning system, and which informs you of any upcoming usage requirements. An extended cost for each item is also listed, in order to give report users some idea of the write-off that might occur if an item is declared obsolete. Damaged goods are a type of dead stock, however, if they are not fixable and cannot be sold in the market, they fall in the category of obsolete inventory.

• The integration of this tool with business operations helps to reduce the probability of obsolete inventory pileup.
• The amount to be written down is the difference between the book value of the inventory and the amount of cash that the business can obtain by disposing of the inventory in the most optimal manner.
• Obsolete inventory doesn’t just collect dust in a forgotten corner of the warehouse—it also has a negative impact on a company’s bottom line.
• 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.
• Manual inventory audits are feasible for companies having limited product lines.

Limited-time promotions, such as special offers or discounts, can also help generate interest and encourage sales of slow-moving items. Obsolete inventory has the potential to disrupt even a very successful brand’s supply chain and fulfillment processes, as well as its profit margins. Learn more about obsolete inventory, why it matters, and what brands can do to decrease and manage obsolete inventory.

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. Note that the true write-off occurs only when you dispose of the inventory. 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. Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce.