How to proactively manage obsolete stock

What is obsolete stock?

Obsolete stock, also known as obsolete inventory, refers to items without demand for a sustained period. This is usually because they have reached the end of their product life cycle, so sales die out or because the items are no longer used in their supply chain.

Why is obsolete stock a problem?

Obsolete stock can be problematic for several reasons:

• It costs money to store, increasing inventory carrying costs
• It absorbs working capital that could be spent elsewhere in the business (and looks bad on the balance sheet)
• It’s often sold at a lower net resaleable value or written off altogether, affecting profit margins

Why do businesses have stock obsolescence?

Stock obsolescence is usually caused by poor demand forecasting and inadequate inventory planning and purchasing. Companies that haven’t accurately spotted a decline in demand and adjusted their stock replenishment policies accordingly will see excess stock build up in their warehouses. As demand disappears altogether, these items will become obsolete.

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

Many companies use enterprise resource planning (ERP) or warehouse management systems (WMS) to manage their stock. Whilst these platforms will have some basic forecasting and purchasing functionality, most lack the sophistication to track stock as it moves through its product life cycle or alert users when they have excess stock so they can prevent inventory obsolescence. Many users resort to excel spreadsheets, but these can be time-consuming to create and keep up to date, leading to inaccuracies.

Helping prevent stock obsolescence

So, what can be done to prevent the above situations from happening in the first place? Here are some tried and tested ways to reduce excess stock in your supply chain and help prevent obsolescence.

Track items through their product life cycle

Make sure you can track each inventory item through its product life cycle and monitor its consequential demand pattern. This allows you to identify products coming to the end of their life cycle and beginning to experience negative demand, e.g. in a continuous decline or lumpy demand (periods of low and no demand). Be careful to ensure that these ebbs and flows aren’t a simple case of seasonality!

In the world of accounting and finance, items with slowing demand are called ‘slow-moving’ items. It’s essential to carefully monitor the stock levels of these items and their associated demand so you can pinpoint any excess inventory (when available inventory is much higher than forecasted demand) and ‘take action’ before any items reach obsolescence.

Act before excess inventory becomes obsolete inventory

Action to prevent obsolete stock can come in several forms:

• You can adjust your reordering parameters to match demand and reduce stock levels.
• You can try to accelerate sales with the help of your marketing and sales teams.
• You can redistribute surplus stock from one warehouse where demand is low to another, where it may be much higher.

With good inventory policies in place, you can aim to avoid stock obsolescence altogether. Potentially, you’ll still achieve a respectable profit margin if you can sell the goods at a reasonable price or at least mitigate damage to your bottom line.

Using automation to improve obsolete stock management

Inventory management systems do a great job tracking inventory movements along the supply chain, many in real-time. Unfortunately, they often fall short regarding demand forecasting and recommending what stock to order and in what quantities. This makes it difficult for inventory managers to prevent excess and obsolete inventory. Therefore, more and more businesses are adding an inventory optimisation tool, such as EazyStock, to their ERP or WMS systems.

EazyStock tracks every SKU along its product life cycle, so excess stock and items with declining or lumpy demand are identified with plenty of time to take action. EazyStock dynamically adjusts statistical demand forecasts, stocking policies and reordering parameters to prevent over-stocking. As products reach the latter stages of their lifetime, stock levels are reduced accordingly.

With replenishment parameters, such as safety stock, reorder points and reorder quantities automatically updated, inventory managers no longer need to spend hours crunching numbers and hoping for accurate results. Instead, they can focus on acting on the data and spending time on more strategic activities.

If you’d like to assess the ‘health’ of your inventory and your stocking policies, simply download our Inventory Health Self-Assessment below, or for a demo, contact us today.