Supply chain businesses today are struggling to keep up with the rising unpredictability of consumer demand. One of the major challenges they are facing is a surge and eliminating Excess and Obsolete stocks while transitioning to a more agile system and profitable business.
In this article, we are going to discuss what Excess and Obsolete stock are, what are its causes, how can we get rid of them, and the best ways to prevent them.
What is Obsolete Stock?
Obsolete inventory, often known as “excess” or “dead” inventory, is inventory that an organization cannot use or sell due to lack of demand.
Companies that haven’t successfully predicted a drop in demand or efficiently lowered their stock replenishment procedures are frequently left with enormous amounts of obsolete products in their warehouses. Obsolete stock is therefore held as working capital on a company’s balance sheet, with little prospect of a return on investment. Obsolete stock, as seen in the infographics below, is inventory that has reached the end of its falling life cycle stage.
Obsolete stock can also occur as a result of rapid changes in consumer tastes, fashion, or technology, or as a result of a product’s rejection by the market.
5 Causes of Excess and Obsolete Inventory
There are a number of common issues that cause inventory to become obsolete. Businesses should take a close look at their operations to see if any of these are issues and if so, address them before they lose money:
1. Inaccurate forecasting
One of the leading causes of obsolete inventory is poor forecasting. When businesses fail to effectively estimate demand based on previous sales data, industry trends, and other variables, they may end up with outmoded inventory.
As a result, they may overestimate demand and order an excessive amount of goods.
2. Inadequate Inventory Management System
Poor inventory management might also lead to obsolete inventory. Optimizing inventory levels can be difficult without adequate inventory planning, which includes the tools and technology needed to track inventory in real-time.
It will be more difficult to determine how much obsolete inventory you have accumulated if you don’t have any insight into what things are slow-moving and taking up storage space.
3. Poor Product Quality or Design
Although selling a high-quality product should be a no-brainer for lowering obsolete inventory, many retailers, wholesalers, and manufacturers do so.
It’s unlikely that your product will sell if it doesn’t fulfill consumer expectations or doesn’t provide anything fresh to compete with existing offerings.
4. Sloppy Purchasing
Data-driven purchasing should be tightly linked to forecasting and demand planning. When it isn’t, and the purchasing team is making decisions based on hearsay or other incorrect information, challenges emerge. Deal-hungry purchasing managers who want to buy things in bulk to save money per item may end up with an excess of stuff on their hands.
5. Inaccurate Lead Times
Buyers’ duties are made harder by long lead times. They need to know how long it will take to get things once they place an order, which can vary depending on the vendor and circumstances. Extended lead times, especially if they’re longer than projected, might be particularly troublesome because demand for a product may fall in the seasons before an organization receives it.
Best Ways to Prevent Obsolete Inventory
Now, let’s look at proactive steps you may take to reduce your business’s surplus inventory levels. Our strategy is to take a few easy measures to avoid the problem from arising in the first place.
- Accurately Forecast Demand
It’s important to look into ways to improve your demand forecasting if it consistently leads to excess or understocking. For starters, estimating demand based on the number of stock days is an overly simplistic and ineffective strategy. Instead, you should think about using demand forecasting methodologies that account for demand trends, seasonality, and promotional activities.
Powerful forecasting systems that take internal and external factors into account will help close the gap between expectations and reality. Accurate forecasting necessitates the use of the right people as well as the correct instruments.
- Ensure Inventory Is Visible and Available Across Channels
Inventory can be balanced out using a centralized view of your stock with a view of stock levels across all locations. This means that excess stock at one location can be redistributed to other locations with low quantities of the same item before ordering more from the supplier.
You can quickly remove surplus stock from your supply chain and reduce the chance of obsolete items appearing on warehouse shelves by monitoring your inventory across all echelons, or locations.
By managing your inventory across all echelons, or locations you’ll quickly remove surplus stock from your supply chain and the risk of obsolete items appearing on warehouse shelves.
- Know Your Reorder Point
Using a precise reorder point calculation, you can forecast when to order new inventory and how much you’ll need to order.
It will also assist you in determining your current inventory turnover rate and provide guidance on how to improve it.
Here’s a simple formula to get you started:
Reorder point = (Average Daily Unit Sales x Average Lead Time in Days) + Safety Stock
- Track Inventory Levels in Real-Time
For real-time inventory management, having real-time access to data across the supply chain is advantageous. This provides you with the most up-to-date inventory levels as well as other details like warehouse receiving and manufacturing timelines.
You can efficiently optimize stock availability, maintain the proper amount of buffer inventory, and know exactly what things need to be repurchased and when to fulfill future demand if you have access to the right supply chain data.
- Perform regular inventory audits
Inventory audits that are consistent and accurate can also help you prevent and minimize outdated inventory by determining how much you’re paying in holding costs to keep slow-moving things that are on the verge of becoming obsolete.
Slow-moving items and deadstock can eat up valuable storage space that could be better spent storing a higher amount of faster-moving things.
You can immediately remove inventory that is unsellable or unlikely to sell by conducting regular audits.
- Use Inventory Management Software
Robust inventory management software allows you to track your inventory, predict future sales trends, and identify slow-moving items before your next backlog.
The right cloud-based solution provides built-in inventory management tools, data, and reports to provide insights into demand forecasting, order management, and more to help you make better inventory management decisions.
Best Ways to Get Rid of Obsolete Inventory
Though there are various techniques to avoid amassing obsolete inventory, it is impossible to avoid holding any form of dead stock. Here’s what you should do if you find yourself with an unsaleable inventory.
- Remarket Items
If items in a given market still have sales potential, you might want to reconsider your marketing strategy. Changing your target audience or geographic locations in marketing campaigns, or selling things through a different sales channel, are examples of this.
While remarketing has the potential to provide some value, it will necessitate extra investments (such as ad spend), which could result in a low return on investment.
- Sell It At a Discount
If the items still have potential, you may launch a promotion, such as a flash sale, to sell them at a discount.
Though obsolete inventory can still have a negative impact on profit margins, placing products on sale can help offset some of the expenses by attracting bargain hunters.
You might also consider pairing outmoded things with a hot-selling item and even offer free shipping.
- Bundle Products
Bundling products is another great technique to get rid of old inventory. If individual items aren’t selling, package them with items that are comparable or are frequently purchased together.
If you’re attempting to get as much product out of your warehouse as possible, you could even combine goods and provide a discount on the package.
- Liquidate Your Items
You may always sell your excess goods to liquidation groups if your clients refuse to acquire your outdated product, no matter how much you advertise, discount, or bundle it.
These are companies that will acquire your goods at the lowest possible price in order to free up warehouse space and capital.
- Donate Obsolete Inventory
Businesses may be allowed to donate their unused goods to charitable organizations. This is not only preferable to discarding the goods, but it may also qualify companies for a tax deduction equal to the cost of those products. This choice is more applicable to merchants and distributors that sell finished items, as opposed to manufacturers and suppliers who work with raw materials.
- Write-Off Obsolete Inventory
For eliminating surplus stock, obsolete inventory write-offs are a common practice.
At the end of the year, companies frequently charge obsolete inventory to their cost of goods sold, absorbing the loss and moving forwards.
How to start and not stop at the end of this article piece?
I would recommend starting simply by just taking this approach, which has negligible risk, simple and yet an amazingly effective positive step towards our goal of a proactive strategy
A) Take pen-paper or manual method (start now)
Start implementing the recommended strategy using your existing technology resources for a known and low-risk segment of Suppliers within your supply chain business to find out what works and what doesn’t. Indeed, this causes efforts, but this will pave the way for better clarity around unknown risks.
B) Take help from technology
Work towards making it unattended, assisted by using Super-fast digital solution such that it works autonomously without losing its efficacy by engaging a solid, affordable Business and Technology solution partner.
If you are a CEO/COO/CIO/Managing Director/General Manager who is spending more time in reactive/preventive mode than future-facing, please reach out for an exploratory conversation.
Our Contact details
Pradeep Mishra (Director and Co-founder)
Ashok Mulchandani (Partner – Business Success and Strategic Transformation)
Amit Bhagat (Director – Business Strategy)
Please feel free to leave your suggestions and thoughts in the comment box below!