Obsolete inventory: What is obsolete inventory?

Obsolete inventory

This is usually done when a product has become so outdated that it has no value left or is a net negative for the company. If they walk into a store filled with too many different products, they might walk right back out. It is a delicate balance between having enough stock to satisfy customers and not having too much of it. 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.

Similarly, a new item that has no advantage over similar products already on the market could underperform and result in excess inventory. On the other hand, reducing obsolete inventory can boost a business’ financial health. It lowers overall inventory costs and the losses that come with writing-off this stock. Not wasting money on obsolete inventory frees up cash the company can invest in other areas to help it succeed. A write-down is a standard accounting obsolete inventory journal entry used to record the value of the old stock. This write-down is typically done when a company has certain products that are no longer useful and will not be sold.

What Causes Obsolete Inventory?

Accumulating obsolete inventory can occur for several reasons, from inaccurately forecasting demand to a lack of proper inventory management. As noted earlier, forecasting is key to striking the right balance with inventory. Businesses should spend time closely studying historical demand, including seasonal trends for certain products, as they build forecasts.

  • Promotions are a proven way to move products that aren’t selling as quickly as expected.
  • This inventory remains unsold or un-utilized for a long time with reduced possibility of being sold.
  • Damaged goods is a type of dead stock and is sometimes considered obsolete if the product is unfixable and therefore, loses its value.
  • GAAP requires companies to establish an inventory reserve account for obsolete inventory on their balance sheets and expense their obsolete inventory as they dispose of it, which reduces profits or results in losses.
  • Staying on top of industry trends, customer insights, supply and demand, and other factors can ensure accurate forecasting.

Inventory obsolescence occurs when a company determines that certain products can no longer be used or sold because demand is so low. Once an item reaches the end of its product lifecycle and a company feels certain that it will never be used or sold, a business will usually write down or write off that inventory as a loss. Secondly, failing to produce a high-quality product will lead to returns, complaints, and an overall fall in sales. Without the proper product testing and introduction in the product’s lifecycle, there isn’t that allotted time to ensure a product is in good condition and able to sell at profitable rates. All of a sudden, your company is left with heaps of bad products that will never sell, and it jumps straight to the obsolete stage of its lifecycle.

Sell inventory at a discount

After two quarters with the inventory management software, obsolete inventory costs are down 70%, saving Central City a bundle of money and putting profit back on an upward trajectory. Inventory management software can automatically track inventory-relevant KPIs like reorder point, days of inventory on hand and inventory turn and deliver daily reports with key numbers. An inventory management solution can also help build more accurate forecasts when it’s integrated with sales and financial software.

You can also use automated systems to detect when certain items are becoming obsolete and adjust your inventory accordingly. But with a bit of planning, you can reduce its impact on your business and ensure that only profitable products remain in stock. Competitors don’t always need to advance the technology to make your product obsolete. 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).

How to reduce obsolete inventory

To recognize the fall in value, obsolete inventory must be written-down or written-off in the financial statements in accordance with generally accepted accounting principles (GAAP). Purchasing should be data-driven and closely tied to forecasting and demand planning. When it’s not, and the purchasing team is buying based on anecdotal knowledge or other unreliable factors, it leads to problems. Deal-hungry purchasing managers willing to buy everything in bulk to reduce the cost per item can also leave a company with too much product on its hands. Perhaps an item breaks easily or doesn’t work as advertised, due to either a design oversight or a mistake in the manufacturing process. Customers may return these items—a problem in itself—and leave negative reviews.

Obsolete inventory

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. If that’s the case, you can avoid over-ordering by buying less inventory more often rather than purchasing inventory for an entire year.

When an expense account is debited, this identifies that the money spent on the inventory, now obsolete, is an expense. A contra asset account is reported on the balance sheet immediately below the asset account to which it relates, and it reduces the net reported value of the asset account. While writing off small amounts of inventory is often unavoidable, obsolete stock doesn’t need to be such a big contributor to liabilities on the balance sheet. Not only is this much preferred to disposing of the items, but it can make organizations eligible for a tax deduction equivalent to the cost of those products. This option is more relevant for retailers and distributors that sell finished goods, rather than manufacturers or suppliers that work with raw materials.

For instance, conducting regular inventory audits can quickly identify obsolete inventory before it eats away at your profits. From there, you can make a decision on when to run a flash sale or donate items so you’re not overpaying in storage fees. The best way to identify obsolete inventory is by implementing the right tools, technology, and processes to identify slow-moving inventory on hand. Along with inventory management, having visibility over your inventory at all times is key. Without inventory visibility, it will be hard to understand how much of each product you need to restock and when (and what product(s) might be worth discontinuing).

Using social media platforms, email newsletters, and other forms of free promotion, market your flash sale on the recess inventory to the tune of “everything must go” and hope you can kill two birds with one stone. One way is to use an inventory management system that helps track inventory throughout its lifecycle. This way, you have data to calculate inventory days on hand and inventory turnover rate, which are key inventory metrics to track. Visibility into real-time inventory levels is critical in enabling organizations to optimize purchasing and inventory management, which will minimize obsolete stock. Supply chain employees need constant access to their inventory positions for every SKU so they can place purchase orders or promote products when stock is low or high, respectively.

If you’ve determined there’s simply not enough demand to run a sale or bundle inventory, you might need to consider liquidation. Inventory liquidation is the process of selling off undesirable inventory at a significant discount in exchange for cash. Flash sales, buy-one-get-one offers, and other promotions can also help your company move obsolete inventory before losing its value.

It can be difficult to predict when certain products will become obsolete, but it is crucial to keep track of trends in the industry and be prepared for such a situation. This can render a product obsolete as newer products offer more features or better performance at a lower cost. 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. Unlike running a sale on bundling inventory, liquidation will not aim to cover costs. A grocery store purchased cases and cases of champagne in November and Decemeber, anticipating high demand for the bubbly drink throughout the holiday season.

Definition of Obsolete Inventory

A purchasing manager made matters worse by buying 200 more 1080p sets than the forecast called for in exchange for a lower price per TV. Products that become obsolete or dead go through multiple steps before they become unsellable. It usually starts as slow-moving inventory, then becomes excess inventory and finally turns into obsolete inventory. Let’s say in our example that we want to set the limit a little higher than the overall stock turn of our products, which is 35 days. Then we can set the limit to 40 days, meaning that 5 of my products would now be considered slow-moving inventory.

Management may be reluctant to suddenly drop a large expense reserve into the financial statements, preferring instead to recognize small incremental amounts which make inventory obsolescence appear to be a minor problem. 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.

Having robust inventory management softwarecan help you track inventory, predict future selling trends, and identify slow-moving items before you put in your next repurchasing order. This experience convinces the business to invest in an inventory management system that will update inventory numbers in real time. Any purchase order is automatically sent to a manager for approval to prevent over-ordering.

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 is inventory that a company still has on hand after it should have been sold. When inventory can’t be sold in the markets, it declines significantly in value and could be deemed useless to the company.