Obsolete Inventory: How to Manage It, Get Rid of It, and Prevent It
Obsolete inventory is a problem that many businesses struggle to solve. We’ll show you how to get rid of it, and what tools you need to prevent it.
Obsolete inventory is the worst kind of inventory you can have (next to no inventory, of course).
It increases your cost of inventory and is hard to get rid of.
If you have too much inventory on hand that’s not selling, chances are you want to know how to get rid of it.
We’ll show you how to do that.
We’ll also show you the causes of obsolete inventory and how to prevent having any in the future.
At the end of this post, we’ll show you how you can better manage obsolete inventory going forward.
Before we get to all of that, let’s define obsolete inventory.
What is Obsolete Inventory?
Obsolete inventory is often referred to as “obsolete stock,” “dead inventory,” or “excess inventory.” These terms all apply to any items that have reached the end of its “product lifecycle,” which means there is no market demand for the product anymore.
Most businesses determine that its inventory is obsolete once there are no sales after a set amount of time.
Obsolete inventory is a warning sign that you haven’t been following inventory management best practices.
Read on to discover the bad practices you might have engaged in that contributed to your obsolete stock.
What Causes Excess and Obsolete Inventory?
There are many causes of excess and obsolete inventory. Here are a few of the main ones:
Inaccurate Forecasting of Customer Demand
Inaccurate or incorrect forecasting of customer demand can cause you to order more stock than you need – leaving you with obsolete inventory after selling only a portion of what you stocked.
An example of inaccurate forecasting in food inventory management would be if McDonald’s A ordered thousands of McRibs for McRib season – expecting a huge demand for McRibs – but failed to account for McDonald’s B in another part of town who would be supplying the same product – lowering A’s expected sales of McRibs and resulting in excess stock.
Poor Quality Product or Design
Offering a high-quality product should be an obvious step for reducing obsolete inventory, but plenty of retailers, wholesalers, and manufacturers sell shoddy products.
If your product doesn’t meet the standards of consumers, or it fails to offer anything new to compete against existing products, it probably won’t sell.
According to Robbie Bach, the former leader of Microsoft’s home entertainment and mobile business, “…we ended up chasing Apple with a product that actually wasn’t a bad product, but it was still a chasing product, and there wasn’t a reason for somebody to say, oh, I have to go out and get that thing.”
The result was that Microsoft had a massive store of unsold Zunes that they had to simply write-off as a loss.
Avoiding Obsolete Inventory
You might realize you have obsolete inventory – or are on your way to holding excess stock – but you’re choosing to do nothing about it.
Worse, you might believe that sometime in the future there will be a new surge in consumer demand and your obsolete inventory will vanish.
Letting obsolete inventory waste away in your warehouse won’t solve the problem, and neither will fantasizing about it disappearing in a stroke of pure luck. Both of these strategies will only increase the amount of dead stock you accumulate.
If you have obsolete inventory, the best thing to do is deal with it right away. Read on to find out how.
How to Get Rid of Obsolete Inventory
Obsolete inventory will continue to hurt your business the longer it sits in your warehouse. Here are a few ways to get rid of it:
Write-Off Obsolete Inventory
Obsolete inventory write-offs are a common practice for reducing excess stock.
Companies often charge obsolete inventory to their cost of goods sold at the end of the year – taking the loss and moving forward.
Donate Obsolete Inventory for Tax Deductions
If you have a surplus of inventory that isn’t going to sell, then donate it to charity and get some tax deductions.
According to Gary C Smith, “businesses can earn a federal income tax deduction under Section 170 ( e )(3) of the U.S. Internal Revenue Code.
The IRS Code says that regular C corporations may deduct the cost of the inventory donated, plus half the difference between cost and fair market value.
If you’re an S corporation, partnership, LLC or sole proprietorship, you qualify for a straight cost deduction.”
Gary’s organization, the National Association for the Exchange of Industrial Resources (NAEIR), can help you get a tax break for donating your obsolete inventory.
If you need to unload your growing inventory more quickly, then try remarketing the item.
If you’re a retailer, reposition the item in your store. Switch up the shelf arrangements. Freshen your displays.
Try selling your items on different social networks. Social media selling is a great way to gauge what marketing messages are working and what aren’t.
You could also try mobile marketing where you sell directly through mobile phones if you know your customers are using their mobile devices most of the time.
Or better yet, implement an omnichannel ecommerce strategy where you try various marketing tactics and messages across all your sales channels.
Sell at a Discount
An easy and straightforward way to move excess inventory is to offer a discount.
Lowering prices doesn’t feel good, but a rising cost of inventory is much worse.
Start small, 10-20% off, and then continue to increase the discount as needed to sell the items.
You could also run a flash sale (which are popular on social media platforms) or a storewide blowout sale event.
The plus side to big liquidation sales is that it can draw in customers you would’ve never reached before.
One thing to keep in mind is to refrain from holding sales events too often. This will train customers to wait for a sale instead of buying at your preferred price.
Product bundling is another excellent way to get rid of obsolete inventory.
If items aren’t selling individually, bundle them with items that are similar or sometimes bought together.
You could even bundle items AND offer a discount on the bundle if you’re trying to move as much stock out of your warehouse as quickly as possible.
Liquidate Your Items
If your customers refuse to buy your obsolete inventory, no matter how much you market, discount, and bundle it, then you can always sell your excess stock to liquidation organizations.
These are businesses that will buy your products at the lowest minimum price to help you free up warehouse space and capital.
Here’s a good place to get started if you choose this option.
How to Prevent Obsolete Inventory
If you’ve gotten rid of your excess stock and want to make sure you never have to deal with it again, here are a few tips for preventing obsolete inventory.
As we pointed out in the “Causes of Obsolete Inventory” section of this post, accurately forecasting demand is a major factor in whether you’ll have obsolete inventory or not.
It might be the biggest factor.
Best practices are to pay attention to sales trends from past years, mostly buy products that have a proven track record for selling consistently well, and pay attention to what your competitors are selling and how well they’re selling it.
Know Your Reorder Point
Using an accurate reorder point formula will help you predict the right time to order more inventory and how much you’ll need to order.
It will also help you understand your current rate of inventory turnover and give you insight into how to increase it.
Here’s a basic formula you can use to get started:
Track Inventory Levels in Real-Time
If you want granular insight into your inventory levels, then you should use something like a cloud-based inventory management system that allows you to know how much inventory you have at all times.
This tool will show you whether you’re carrying excess stock and need to ramp up your sales efforts, or if you’re getting low on certain products and need to reorder.
How to Better Manage Obsolete Inventory
Obsolete inventory management is mostly about understanding your customers and making sure you’re matching their demands.
If you don’t, you’ll inevitably order more than you need or order products your customers don’t want.
So what’s the best tool for forecasting customer demand?
The same tool we mentioned above that tracks inventory levels in real-time – cloud-based inventory management software.
It allows you to track your sales alongside your stock for deeper insight into your customers’ buying patterns and the success of your marketing strategies.
If you want to prevent obsolete inventory from raising your costs and cluttering your warehouse, we can help.
Prevent Obsolete Inventory with This Cloud-Based Solution
Through accurate forecasting reports, you can predict when sales will rise, dip, and plateau. You’ll know what sells the most and what doesn’t sell at all. Using this data, you’ll be able to order just enough to satisfy customer demand without piling up more inventory than you need.
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Source: Dear Inventory Blog