Inventory that a company does not think it can utilize or sell because there isn't enough demand is referred to as obsolete inventory, also known as "excess" or "dead" inventory. Inventory frequently has to be updated after a given amount of time since it has reached the end of its useful life.
Before a product can no longer be sold, it goes through a number of stages that make it dead or outdated. Typically, inventory that is sluggish to move becomes excess inventory; surplus inventory becomes outdated inventory and eventually obsolete inventory.
Explaining Obsolete Inventory
Businesses that sell tangible goods and those engaged in maintenance and repair must keep track of their outmoded inventory. The quantity of outdated stock a company has can be a crucial sign of whether its buying and inventory management, also known as material requirements planning (MRP), is optimized or whether they need to be reevaluated.
Because obsolete inventory can lead to substantial cash flow difficulties, it might harm a firm's capacity to weather a challenging period. If a business with thin margins frequently needs updated inventory and deals with the issue, it might be in serious trouble.
What's the Process for Obsolete Inventory?
Businesses must establish their standards for what constitutes obsolete inventory, and these standards will differ between different product categories and sectors (think about the differences between furniture and food, for example). To create rules for when inventory products should be classified as slow-moving, excess, and outdated, start with criteria relevant to your business.
Inventory might become outdated for several reasons, including faults with the product, inadequate forecasts, ineffective inventory management, or other problems. Businesses may reduce dead inventory by carefully monitoring their inventory locations. If you can identify products while they are still in the slow-moving or surplus stages, you can make money from them before they become outdated.
Five Reasons for Too Much and Obsolete Inventory
Inventory can become outdated for a variety of frequent reasons. Businesses should carefully examine their processes to see whether any of these are problems and if so, correct them before they cause financial loss:
· Inaccurate forecasting
· Inadequate Management System of Inventory
· Poor Quality or Design of Product
· Sloppy Purchasing
· Inaccurate Lead Times
How is inventory reserve determined?
Business managers typically examine historical data to determine what proportion of their inventory is usually unsold owing to variables that might include everything from falling out of style to breakage and theft. Then, they calculate their netlist, shown on the company's balance sheet, by deducting a certain proportion from their gross inventory. The proportion of the reserve can also be changed at the discretion of the business management to reflect shifting economic conditions.
FINAL INSIGHT
A lot of companies spend too much money on obsolete inventory. Obsolete stock can contribute less than tiny amounts of inventory to do liabilities on the balance sheet.
One option to recover the cost of surplus inventory is to find a second home for items that have been placed in the warehouse for too long. By giving staff the information they need to make wiser purchasing and inventory management decisions, software that offers complete inventory visibility and thorough reporting may help stop the issue before it even arises.