May 26, 2023 |

How to Manage Inventory Obsolescence in Small Businesses

inventory obsolescence

Effective inventory management is especially crucial for small business success due to minimal resource availability and the greater impact of financial loss caused by inventory obsolescence. Inventory obsolescence refers to outdated or unsellable products or goods that usually bring along a loss in profits. Small businesses must be proactive in managing their inventory to avoid obsolescence and minimize the financial impact of excess or obsolete inventory.  Here, we will explore some practical tips and strategies to help small businesses manage inventory obsolescence and improve their overall inventory management practices.

What is obsolete inventory?

Inventory obsolescence refers to the situation where a company’s inventory items become outdated, unusable, or no longer in demand by customers. This tends to happen when consumer preferences change, technological advancements occur, there are changes in market conditions, or the result of poor forecasting of future demand.

When inventory becomes obsolete, it usually results in financial loss because the monies spent acquiring it cannot be recovered. Additionally, the company may also incur additional costs associated with disposing of the obsolete inventory or attempting to sell it at discounted prices.

To mitigate the risk of inventory obsolescence, companies can take steps such as regularly reviewing inventory levels, monitoring market trends, improving forecasting techniques, and implementing effective inventory management systems.

How bad is obsolete inventory?

Obsolete inventory can be quite bad for a business when in significant quantities and when the proportion of obsolete inventory outweighs the profits from sold inventory.

Aside from the initial investment into this inventory, the company may also incur additional costs associated with disposing of the inventory or attempting to sell it at discounted prices, further eroding profits.

Another possible negative outcome is the impact it can have on a company’s reputation. If customers view the seller as passe’, they will find the more current products with their competitors.

To mitigate the impact of obsolete inventory, companies need to regularly review their inventory levels, monitor market trends, and implement effective inventory management systems to minimize the risk of inventory obsolescence.

What Causes Inventory Obsolescence?

Inadequate Inventory Management

Doing a bad job of inventory management can contribute to stock obsolescence in several ways:

  1. Overstocking: If a company orders more than they can sell, the excess can build up and may become unsaleable. Faulty demand predictions can be one reason; not monitoring inventory levels closely enough is another.
  2. Slow-moving inventory: If consumer demand wanes, unsold items may may become obsolete. Poor inventory management can lead to slow-moving inventory because staff is not modifying purchase order habits to reflect change in demand.
  3. Lack of inventory tracking: If a company does not have an effective inventory tracking system, it may not be able to identify when inventory items are becoming obsolete. Companies working off spreadsheets often encounter this problem as their businesses outgrow their original processes. This can lead to inventory sitting on shelves for too long, ultimately becoming unsellable. (Luckily, this problem is easily solved with SOS Inventory!)
  4. Inaccurate inventory valuation: Often, when a company does not keep up with changing inventory values to reflect changes in trends or demand, it ends up with product it can’t sell at full price.

Transparency Deficiency

Lack of transparency in inventory management often plays a role in obsolescence ways:

  1. Lack of visibility: Without visibility into its supply chain and inventory levels, a business may not be aware of excess inventory or slow-moving items, leading to overstocking and usually, obsolete inventory.
  2. Inadequate communication: Poor communication skills or tools are frequently to blame for data discrepancies between departments or suppliers in the supply chain. This can cause delays in inventory replenishment or result in orders being placed for items that are no longer needed.
  3. Inaccurate demand forecasting: Without knowledge of customer demand, a business is unlikely to have the tools it needs to accurately forecast inventory needs. Ordering the same amount year-round for a business whose sales fluctuate seasonally is a blind approach to inventory management.
  4. Lack of data analysis: If a company does not analyze inventory data regularly, it may not be aware of trends or changes in demand. This can lead to slow-moving inventory that eventually becomes obsolete.

Having visibility into inventory levels, effective communication between departments and suppliers, accurate demand forecasting, and regular analysis of inventory data will all help mitigate this problem.

Missing Supply Chain Data

Lack of supply chain data adds to the problem a few ways:

  1. Inaccurate demand forecasting: When missing supply chain data, you cannot make accurate predictions. Naturally, this is a contributing factor to ordering the wrong amounts of product.
  2. Delayed inventory replenishment: Without software to access real-time supply chain information, a business is operating blindly and probably won’t be ordering the right amount at the right frequency to compensate for changes.
  3. Inefficient inventory management: Without inventory levels or lead time data, managing purchase orders can be a nightmare.
  4. Poor quality control: If you don’t monitor the quality of products coming from your suppliers, you could end up with defective or expired products. If caught, the business typically receives credit and does not have to eat the cost of product it cannot sell.

How to Identify Obsolete Inventory

There are several ways to identify inventory obsolescence:

  1. Aging inventory: One way to identify inventory obsolescence is by tracking the age of inventory items. If certain items have been in inventory for a long time without being sold, they may become obsolete.
  2. Slow-moving inventory: Another effective approach is by tracking slow-moving inventory. Items that are not selling as quickly as expected may also be on their way to obsolescence.
  3. Market trends: Monitoring market trends can help identify inventory items that are losing their appeal. For example, if consumer preferences shift away from a particular product, it may become obsolete.
  4. Expiration dates: For items with expiration dates, tracking these dates can help identify inventory that is about to go bad. Moving along product well before expiration dates will ensure only high quality items are delivered to your customers.
  5. Sales data: Analyzing sales data can help identify items that are not selling well or have declining sales, another important indicator.
  6. Supplier information: Obtaining information from suppliers on product lifecycles and availability can also help identify items on their way out.
  7. Physical inventory counts: Conducting regular physical inventory counts can reveal identify items that are not moving and may become obsolete.

What to do with Obsolete Inventory

  1. Liquidation: Slashing prices to sell online through their own ecommerce store or through a discounted marketplace can help businesses recover some of the cost of the inventory and free up storage space.
  2. Donation: Another option is to donate to charity or non-profit organizations to turn the loss into a tax deduction for the business while also supporting a good cause.
  3. Recycling or disposal: For items that cannot be sold or donated, businesses may need to dispose of them through recycling or disposal services, depending on the nature of the product. Although this may incur some cost, it can help free up storage space and avoid potential environmental issues.
  4. Repurposing: In some cases, businesses may be able to repurpose obsolete inventory for a different use or market. For example, apparel items with outdated designs could be repurposed into new products or sold to discount retailers.

How to Avoid and Reduce Obsolete Inventory

A few options that are quite effective in reducing the risk of obsolete inventory include:

  1. Regular inventory audits: A physical inventory audit can shed light on items on your shelf that have been sitting there for a long time.
  2. Inventory management software: Software like SOS Inventory is highly effective in unifying your inventory data all across your business so you can ensure accurate inventory levels and identify changes in demand patterns to minimize the chance of generating obsolete inventory.
  3. Accurate demand forecasting: Ordering the same product consistently when demand changes is a sure way to end up with obsolete inventory. Forecasting demand by using sales history and marketplace statistics can help reduce the risk of obsolete inventory.
  4. Real-time supply chain data: Having real-time visibility into the supply chain can help businesses make informed inventory management decisions and avoid stockouts or overstocking.
  5. Effective communication with suppliers: Communicating effectively with suppliers can help businesses avoid overstocking or understocking inventory, as well as receiving defective or expired inventory. (Using software can often solve this problem).
  6. Implementing a just-in-time (JIT) inventory system: A JIT system can help businesses minimize inventory levels and reduce the risk of obsolete inventory because the process works by ordering only what is needed to fulfill a custom order.

Obsolete Inventory FAQs

How do you manage excess and obsolete inventory?

Managing excess and obsolete inventory requires a proactive approach to inventory management. Here are seven steps businesses can take to do just that:
1.     Identify excess and obsolete inventory: Audits and regular tracking will reveal excesses requiring your attention.
2.     Analyze the reasons for excess and obsolete inventory: Great reporting tools like the ones you’ll find in SOS Inventory, will allow you to identify root causes of excess and obsolete inventory, such as inaccurate demand forecasting, poor inventory management, or changes in market trends.
3.     Implement corrective actions: Take corrective actions based on the reasons for excess and obsolete inventory. This may include adjusting inventory levels, improving demand forecasting accuracy, or adjusting ordering practices.
4.    Liquidate or dispose of it: Ideally, if you can sell it for less and can recover some of the original costs, that’s better than losing the entire initial investment.
5.    Monitor inventory levels and demand patterns: Regularly monitor inventory levels and demand patterns to update inventory levels as they fluctuate.
6.    Improve supply chain visibility: By improving supply chain visibility, businesses can better manage inventory levels and avoid stockouts or overstocking, which can lead to excess or obsolete inventory.
7.    Utilize technology: Implementing inventory management software or other technology solutions can help businesses track inventory levels, demand patterns, and supply chain data, allowing for more accurate inventory management and reducing the risk of excess and obsolete inventory.
By taking these steps, businesses can effectively manage excess and obsolete inventory, reduce the risk of financial losses, and improve their overall inventory management processes.

What are examples of inventory obsolescence?

1.    Products with expired or soon-to-be-expired shelf lives, such as food products, cosmetics/skin care, chemicals or medical supplies.
2.    Products that are no longer in demand due to changes in customer preferences or market trends, such as old styles of furniture or clothing items.
3.    Products that have been replaced by newer models or versions, such as electronics (mobile phones) or appliances.
4.    Products that were overstocked or ordered in excess, resulting in excess inventory.
5.    Products with seasonal demand that were not sold during the appropriate season, such as winter clothing that was not sold during the winter season.
6.    Products that were damaged during transit or while in storage, making them unsellable.

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