Businesses often find themselves saddled with obsolete or unsellable inventory. This inventory collects dust, takes up valuable warehouse space, and ties up capital that could be better used for more productive assets.
New product launches and upgrades can instantly turn older models into relics no one wants. Changing consumer preferences and lightning-fast trends can quickly make hot-selling products obsolete. Excess inventory ordered during periods of overly optimistic demand forecasting can become boat anchors when the tides of demand suddenly shift.
In this article, we dive into the problem of obsolete inventory. We’ll examine its common causes, the financial and operational challenges it creates, and strategies companies can use to identify and deal with obsolete stock.
What is obsolete inventory?
Obsolete inventory, also known as dead inventory or excess inventory, consists of products that are no longer useful for sale. Obsolete inventory includes outdated technology models, expired food or pharmaceuticals, items damaged in transit, products that failed quality control, overruns of promotional giveaways, and excess seasonal merchandise. Accumulating obsolete inventory occupies physical warehouse space and ties up capital unproductively.
The liquidation of obsolete stock frees up square footage for faster-moving products. It also unlocks cash invested in unsaleable goods to reinvest in marketable inventory aligned with current consumer trends and demands. Intentionally disposing of nonperforming inventory improves operational efficiency and overall profitability.
Causes of obsolete inventory
- New product launches
- Changes in consumer preferences
- Product damage or deterioration
- Poor demand forecasting
- Ineffective inventory management
Obsolete inventory can sneak up on businesses if they aren’t vigilant. Understanding the root causes enables companies to take proactive steps to avoid accumulating this unproductive asset that strains profits.
New product launches
When companies release new product models or versions, they often instantly make older versions obsolete. Proper inventory management and planning for these product transitions through promotions and liquidations can minimize leftover obsolete stock. Staying on top of product life cycles is key to avoiding inventory write-downs.
Changes in consumer preferences
Changing consumer tastes and rapidly evolving trends can quickly turn hot-selling products into outdated duds, taking up warehouse space. Regularly reviewing sales velocities, assessing market trends, and conducting market research allows businesses to identify declining demand and efficiently adjust inventory and production levels.
Product damage or deterioration
Inventory items susceptible to damage or natural deterioration over time can expire or become unsellable. Implement procedures to identify and rotate perishable stock and protect items from damage to avoid obsolescence and waste. Monitoring stock conditions ensures that your products are of the highest quality and have sales potential.
Poor demand forecasting
Inaccurate demand projections directly lead to excess inventory and obsolete stock buildup. Leveraging historical sales data, marketing input, and market trends improves forecasting accuracy to prevent over-ordering. Use predictive analytics tools that can support better demand planning to minimize obsolete inventory.
Ineffective inventory management
A lack of visibility into inventory levels and movement can result in obsolete items accumulating undetected. Robust inventory management systems provide metrics and control to identify and manage slow-moving stock before it becomes obsolete. This strong inventory management approach is crucial for minimizing obsolescence.
How to identify obsolete inventory
- Review sales reports
- Check expiration dates
- Inspect stock condition
- Compare to purchase orders
- Verify inventory accuracy
- Analyze customer metrics
Obsolete inventory can have serious financial repercussions on a business, and early identification can help manage potential losses. Here’s how retail businesses can identify obsolete inventory:
1. Review sales reports
Often, the first sign of obsolete inventory is a drop in sales. For instance, if winter jackets aren’t selling well throughout the peak season, it’s a strong indication they might become obsolete.
To catch this early, use your inventory management software to track product sales over time, specifically targeting items with consistently low or declining sales.
2. Check expiration dates
Products in certain retail sectors, such as cosmetics, have a limited shelf life. For example, a batch of sunscreen might be nearing its expiration date. Rather than wait for the product to expire and become obsolete, use your inventory management system to set alerts for items approaching expiration dates.
This proactive approach allows you to take action, such as selling the batch of sunscreen at a discount.
3. Inspect stock condition
Some products may become unsellable due to physical deterioration. T-shirts may not have an expiration date, but they can fade if exposed to prolonged sunlight, which decreases their market value, potentially making them obsolete inventory. To prevent this, schedule regular stock condition checks.
4. Compare to purchase orders
Another effective way to spot obsolete inventory is by comparing current stock to recent purchase orders. If a particular brand of sneakers hasn’t featured in any purchase orders for several months, it could be a sign of obsolescence.
5. Verify inventory accuracy
Maintaining accurate inventory records is a vital part of controlling obsolete inventory. Regular inventory audits ensure that the data in your inventory management system matches your physical stock.
6. Analyze customer metrics
Customer buying patterns can provide insights into potential inventory obsolescence. If a specific toy line is consistently unpopular among key customer groups, it might suggest these items are becoming obsolete.
Use your inventory management system to analyze sales data by customer or customer group, and act on these insights to improve your obsolete inventory management.
How to get rid of obsolete inventory
- Sell at a discount
- Donate to charitable organizations
- Return to supplier
- Sell to liquidation companies
- Upcycle of repurpose
Implementing strategies to manage obsolete inventory is critical to effective inventory management. Here are several methods you can employ to reduce or eliminate obsolete inventory:
1. Sell at a discount
Selling items at a discount is a common way to clear slow-moving inventory. Your inventory management software can help identify such items, and you can then create promotional offers or clearance sales to move these products more quickly and prevent the accumulation of obsolete inventory.
2. Donate to charitable organizations
Many items considered obsolete inventory in a retail context may still have practical use. For example, clothing items from last season can be donated to local charities. This frees up storage space and may carry the benefit of tax deductions.
When items can’t be sold or donated, they can be written off. This process involves removing the items from your financial statements, providing a more accurate representation of your company’s financial health.
While you won’t recover any money through write-offs, they can aid in managing inventory obsolescence and may offer tax benefits.
4. Return to supplier
If your supplier contracts allow returns or buybacks, you can approach them to return obsolete inventory. Though you’re unlikely to recover the total market value, returns can help reduce obsolete inventory and recover some costs.
Review your supplier contracts and understand the return or buyback policies and any potential restocking fees or penalties before making a decision.
5. Sell to liquidation companies
Liquidation companies specialize in dealing with obsolete inventory. They buy such inventory and resell it, often at lower prices. While you won’t recoup the total market value, selling to a liquidation company can generate revenue and quickly free up valuable storage space.
6. Upcycle or repurpose
Consider whether your obsolete inventory can be repurposed or upcycled. Unsold fabric, for example, could be used to create a new line of accessories. While this approach requires creativity and additional resources, it can turn a potential loss into a profitable product.
Obsolete inventory FAQ
What is the best thing to do with obsolete inventory?
The best course of action depends on the specific inventory. Options include selling at a discount, donating to charities, returning to suppliers, selling to liquidation companies, and repurposing (upcycling) the items.
How do you avoid obsolete inventory?
Preventing obsolete inventory involves proactive management strategies, such as accurate forecasting, an efficient inventory tracking system, and regular review of sales and customer demand trends.
How do you account for obsolete inventory?
Obsolete inventory is typically written off from financial statements, representing a loss in inventory value. This process helps minimize obsolete inventory’s impact on the business’s financial health.
Can you sell obsolete inventory?
Yes. Selling obsolete inventory, often at a discount, is a common strategy to recover some of its value and clear valuable storage space.