Obsolete inventory uses up valuable warehouse space, and is tied up money that you can’t fully recover. It’s obsolete because it has either deteriorated, become technologically obsolete, is at the end of its product life cycle, or is no longer required for your operations. While there are ways of getting rid of obsolete stock without it becoming a total loss, it’s best to not have the problem in the first place. Understanding why obsolete inventory occurs is the first step in preventing it.
Here are four common reasons why inventory becomes obsolete:
1. Inaccurate Demand Forecasting
Forecast accuracy drops off as you project further into the future. Technology and fashion for example, change rapidly, and inventory acquisition based on unrealistic long-term projections is therefore risky. Inaccurate forecasting may also occur when predictions aren’t based on past sales data. This happens when marketing introduces a new product for which you have no historical data. If their market analysis is faulty, you could end up with unsellable inventory.
2.Your Product Changes
Product component specifications are often changed in engineering. If there is no system in place that uses up your inventory of old components, before using the new, every technical specification change can generate unusable inventory.
For instance, imagine a company that manufactures tablets. They might decide to upgrade their tablets to include a faster processor and more memory. This would require them to redesign the circuit boards and other internal components. If they don’t use up their existing stock of old circuit boards before starting production with the new ones, they’ll be left with obsolete inventory that they can’t use for future production.
This is why it’s important to have a good inventory management system in place that can track product changes and forecast demand. This will help you to avoid overstocking on obsolete inventory and ensure that you have the right products in stock to meet customer needs.
3. Excessive Lead Times
Long lead times require that you keep a larger inventory. A larger inventory sits in your warehouse longer. This increases your vulnerability to demand changes and other uncertainties that can make the inventory obsolete.
For example, imagine you sell a particular type of fitness tracker that requires a specialised battery. If the lead time for these batteries is several months, you’ll need to order a large quantity in advance to ensure you have enough stock to meet demand. However, if there’s a sudden shift in consumer preferences and fitness trackers with different battery types become more popular, you could be stuck with a large stock of obsolete batteries that you can’t use.
To mitigate this risk, work with suppliers to reduce lead times whenever possible. Additionally, implementing forecasting techniques can help you anticipate demand fluctuations and order inventory accordingly.
4. Outdated Inventory Management
Some businesses still rely on the intuition or gut feelings of their sales employees instead of using the forecasting capabilities of modern inventory management software. A lack of integration between different company departments can cause overstocking of inventory that becomes obsolete.
For example, a purchaser orders from his suppliers out of habit, or overorders to take advantage of a bulk discount deal, without considering the projected demand for the items. This wouldn’t have happened had the purchaser placed orders with the help of inventory management software.
For more information on inventory management, please contact us.
