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How to Identify and Avoid Obsolete Inventory

Obsolete inventory

Good communication between product development, sales, purchasing and inventory control, is essential. One of the key ways to prevent inventory from going obsolete, and even enter the slow-moving territory, is to nail down solid inventory tracking processes. Without thorough and accurate inventory tracking, your company can lose sight of what items need to be tracked, how they are sold, and how many you need to order to replenish inventory. Bundling products that are slow-moving with products that are best sellers can be one way to get it moving out the door.

  • Inventory control describes having a thorough oversight of each item in the warehouse.
  • Obsolete inventory takes up valuable space that could be used for items that shoppers want.
  • One way is to use an inventory management system that helps track inventory throughout its lifecycle.
  • Try a slight discount at first, and increase it as necessary until the product starts coming off the shelves at a faster clip.

In this example, the optimal stock would be 4 quantities to secure 98% of the service. An automated system tracks your inventory, keeping tabs on its levels in the warehouse and maintaining records of the numbers that are sold. With detailed information like this, there’s less chance of your buying decisions coming back to haunt you. When you’ve ordered a lot more of a particular item than there’s a demand for, or miscalculated the market and added items no one wants to your inventory, you’re left stuck with it.

Businesses could also experiment with different channels—if certain items aren’t selling in-store, promote them through social media or online ads that drive shoppers to the ecommerce site. 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. 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. Inventory refers to the goods and materials in a company’s possession that are ready to be sold.

Reasons inventory may become obsolete

Put simply; the term refers to items that are either impossible or very difficult to sell. We write-down when the realizable value falls under the cost at which we have recorded Inventory. And as soon as the stock has no value and we plan to take it off our records, we have to write it off. Here we calculate the Average Inventory as the average between the Opening and Closing balances of our Inventory accounts. One way to support that is by decreasing the slow-moving Inventory and replacing it with fast-moving items.

Obsolete inventory

If you hold on to this inventory until it is obsolete, you will have to just accept your losses and analyze your data to improve the sales of the rest of your inventory. Being able to identify slow-moving and excess inventory and knowing the sales trends of your products before they become obsolete can help you save your company from the financial burden of obsolete inventory. You can also identify obsolete inventory by the stock you have on hand and usage patterns. You can calculate months on hand by dividing monthly usage from the amount of stock. This equates to the ratio of the average number of months inventory stays in stockrooms or warehouses. You can adjust this ratio with outside factors that may affect the product’s sales, including season, location and past sales history.

Every sales channel is different, and a product that does well on one may not sell on another. Guesswork has no place in this model — a company has to have the right goods in the right amounts at the right place at the right time, or they’ll end up with that obsolete stock somewhere. The disposal of obsolete inventory occurs when it cannot be repurposed, kitted, donated, or discounted. Depending on the type of product, this could be done through recycling programs or other disposal methods. At this point, it will be written off as a total loss on the company’s financial statements.

How to Identify Obsolete Inventory

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. Because working with inventory management systems gives you data about your sales and products, it also gives you the tools to better understand your management skills by evaluating productivity and concerns in staffing.

Often, management ignores strong signs and believes in some almost miraculous ‘come back.’ And this seldom happens, resulting in piling up slow-moving and excess stock that slowly transforms into obsolete Inventory. Whenever we have identified dead stock, it’s best to deal with it straight away, so it no longer hurts the business with holding costs and tied up cash. To report inventory obsolescence reserve, you need to prepare and present certain financial statements and disclosures. On the balance sheet, you report your inventory obsolescence reserve as a deduction from your inventory account, and show the net inventory value as a current asset. For example, if your inventory is $100,000 and your inventory obsolescence reserve is $10,000, you report $90,000 as your net inventory value. On the income statement, you report your inventory obsolescence expense as a component of your cost of goods sold, and show the impact on your gross profit and net income.

Retaining obsolete Inventory only makes sense if future gross profits cover the accumulated holding costs. The cost of holding on to obsolete Inventory is another factor we need to consider when analyzing our stock and preparing our action plan to decrease obsolescence. These consist mostly of warehousing expenses like rent (or depreciation if we use our premises) and include other relevant costs like equipment depreciation, salaries, and utilities. To get a more detailed and actionable insight, we can separate our stock into groups of similar items.

These numbers can change quickly, so employees need the most up-to-date information. ERP inventory systems draw on a variety of data sources to help companies better understand the performance history of various SKUs, among other insights. 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.

Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing. If the products still have potential, you could also sell them at a discount by running a promotion, such as a flash sale. With more visibility, you can find ways to optimize inventory to meet demand and avoid common inventory issues, such as overstocking. Minimizing both is a function of inventory best practices and analysis techniques. This report shows a list of items with the quantity and value that are older than N days.

Obsolete Inventory Analysis

You can get the inventory turnover rate by dividing sales of a product by average inventory to get an idea of the time it takes for you to sell products to customers. 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 market value and demand.

For example, a beauty brand might notice that demand for products with SPF starts to pick up in the spring and reaches a peak in the summer. While this trend seems obvious, inventory tracking might also help the same brand detect a smaller demand increase around the end of the year when people might be taking tropical vacations. Finally, consider donating excess stock to charitable organizations or community outreach programs.

Obsolete inventory, also known as excess inventory or dead inventory, is the inventory that remains unused when the product life cycle ends. This inventory remains unsold or un-utilized for a long time with reduced possibility of being sold. Per Generally Accepted Accounting Principles (GAPP), such inventory is generally written off as a production a financial loss to the company.

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. The above trends of quarterly usage/sales must be compared to previous years to determine if the usage trend is increasing or decreasing. You can accomplish this by extending the usage/sales by quarter like in the above example to include the previous year and if necessary, the year before that. 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.

How to get rid of dead stock

With ShipBob, you can split inventory across our international fulfillment network and easily track and manage inventory in real time all through ShipBob’s user-friendly merchant dashboard. Though there are several great inventory forecasting solutions on the market, you can always rely on a 3PL to provide the insights you need to better forecast demand without the extra cost. An inventory write-off can help you reduce your tax liability, which involves taking the inventory off the books when it is identified to have no value and, thus, cannot be sold. Having access to supply chain data can help you improve supply chain efficiency, including how well inventory is managed.

Obsolete inventory FAQs

This inventory has not been sold or used for a long period of time and is not expected to be sold in the future. This type of inventory has to be written-down or written-off and can cause large losses for a company. When it becomes obsolete, that amount is reduced by the value of the obsolete stock.

Before you start your audit of inventory and stock, you need to plan your audit approach and identify the potential risks of material misstatement related to inventory obsolescence and slow-moving items. Based on your risk assessment, you should design your audit procedures to obtain sufficient and appropriate audit evidence to verify the existence, completeness, valuation, and disclosure of inventory and stock. Inventory management requires a person within the company to be in charge of overseeing the ordering, storing and selling of the company’s inventory. Related to this is obsolete inventory management, which is the process of tracking any excess products that the company cannot sell and reporting those losses.

Inventory obsolescence is a minor issue as long as management reviews inventory on a regular basis, so that the incremental amount of obsolescence detected is small in any given period. However, if management does not conduct a review for a long time, this allows Obsolete inventory to build up to quite impressive proportions, along with an equally impressive amount of expense recognition. To avoid this issue, conduct frequent obsolescence reviews, and maintain a reserve based on historical or expected obsolescence, even if the specific inventory items have not yet been identified. Since obsolete inventory is no longer sellable, it’s no longer considered an asset since it can’t be sold.

They could also be sold at a discount, liquidated, donated, or written off as a loss. Whatever your options to reduce inventory levels, the first step is to identify which items are potentially in excess and at risk of becoming problematic, whether raw materials or finished goods. Hopefully, this offers you a new method to identify inventory issues before they become a financial burden. Calculating your company’s inventory turnover ratio is essential if you wish to eliminate your slow-moving and obsolete stock.

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