How to manage obsolete stock in your inventory

What is obsolete stock?

Obsolete stock is a term that refers to inventory that has reached the end of its product life cycle. In this stage of the product life cycle, there is no market demand for the product.

Companies that have not accurately forecasted a decline in demand or effectively reduced their stock replenishment policies often times are left with large quantities of obsolete stock in their warehouses. Obsolete stock then sits on a company’s balance sheet as working capital tied up with little promise of a return on investment. In the graph below, obsolete stock is inventory that reaches the end of its declining life cycle stage.

EOQ changes as SKUs move through their Product Lifecycle

Surplus stock can also be the result of quick changes in consumer trends, fashion or technology, or the market may simply reject a product. In both cases, effective demand forecasting and inventory management processes should prevent this happening.

How to reduce excess & obsolete inventory

Act before excess stock becomes obsolete

Make sure you can track products through their product life cycle. Once your inventory reaches the obsolete stage, it’s typically too late to take actions that will result in a profitable return on investment. Instead you need to strike when a product’s sales start to hit a downward trend (but be careful that this isn’t due to seasonality!) and begin to amend your reordering parameters to match demand.

If you identify excess stock, which is stock you have too much of compared to your forecasted demand, try to accelerate sales with the help of your marketing and sales teams before it becomes obsolete.

With good inventory policies in place and a better understanding of real customer demand, companies can avoid stock obsolescence altogether.

Get rid of obsolete stock

Many companies are unsure what to do with obsolete stock and make the mistake of not liquidating it right away. Some companies will sit on their obsolete inventory to avoid showing a large write off or expense on the quarterly report. This is because it’s never easy to admit that a once large investment, which was supposed to yield revenue, has become an expense to the business. But be warned, if you don’t address obsolete inventory today, it will just continue to grow. Don’t let accounting drive poor operational decisions. Get obsolete inventory off the books and use that freed-up warehouse space for productive and profitable inventory turns.

Avoiding inventory obsolescence

Inventory management systems do a great job of tracking inventory movements, but they often fall short when it comes to identifying what stock to carry and in what quantities to meet customer demand. To avoid carrying excess and obsolete stock, you need to ensure your demand forecasting, stocking policies and replenishment processes are fully optimized.

Software solutions, such as EazyStock, will automate these processes using advanced algorithms to provide easy-to-understand data that helps inventory management teams stock the right products in the right place at the right time. With EazyStock, all SKUs get tracked along their product life cycle so demand trends are identified with plenty of time to adjust replenishment policies and the risk of excess stock piling up is dramatically reduced. Obsolete stock then becomes a thing of the past.

If you’d like to assess the ‘health’ of your inventory and your stocking policies, simply download our Inventory health self-assessment below:

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