Is your obsolete inventory the biggest red flag in your balance sheets? This is no small matter.

From tying up your capital to taking up crucial storage space, obsolete inventory can be a heavy burden for your business. The worst part is that, at the end of the day, it won’t generate any profits.

If you’re trying to overcome this business obstacle once and for all, you’ve come to the right place. Keep reading to learn how you can manage your inventory to reduce and prevent obsolete items.

Understanding Obsolete Inventory

Obsolete inventory refers to items that are no longer sellable or usable. They are also called dead inventory, excess inventory, or dead stock. Some may also call them expired inventory because the items have lost their value and cannot be sold anymore.

Obsolete inventory is often the result of the following:

• Lack of demand or changes in consumer preferences
• Changes in technology
• Loss of market value
• Product quality issues
• External factors (global pandemic, geopolitical issues, economic downturns)
• Poor inventory management practices
• Inaccurate demand forecasting

Industries like electronics, apparel, and furniture are naturally more vulnerable to carrying obsolete inventory. However, any business with a physical inventory can suffer due to obsolete inventory.

Why Is Obsolete Inventory Problematic?

Obsolete inventory can be a significant burden for businesses because they still generate expenses with no chance for profits. Carrying too much dead inventory is also an indicator of poor inventory management and may be a sign that a business is experiencing financial difficulties.

Obsolete inventory is typically written off from accounting records when it cannot be sold or written down when it can be offloaded at a significantly lower price. Either way, dead inventory shows up on a business’s balance sheets and can be a huge red flag for investors.

Fret not, as 20% to 30% dead stock is about the average, even for healthy businesses (though it can be a cause of concern for those that are already struggling). If you’re seeing an increase in dead stock, there are many actions you can take to prevent the situation from worsening.

Difference Between Slow-Moving, Excess, and Obsolete Inventory

Slow-moving or excess inventory is the same thing: they include products that exceed optimal stock levels needed by a business to meet demand. In contrast, obsolete inventory no longer has any value and is in no demand from consumers.

Identifying Obsolete Inventory

Identifying inventory is the first step to preventing it from becoming obsolete.

All products have a life cycle where they go from courting high demand to becoming slow-moving and then stop being sold altogether. Many different phases come to pass before a product becomes obsolete. By identifying a product when it’s in the process of becoming obsolete, you can make sure to resolve the issues and potentially unload items to minimize losses.

Here are some ways to identify obsolete inventory:

• Monitor product lifecycles to see when a product is approaching obsolescence
• Get consumer feedback to identify changing preferences and market trends
• Test for obsolete inventory by analyzing sales reports, market trends, inventory turnover ratios, and other metrics
• Implement regular inventory audits
• Use inventory tracking tools and technologies

Obsolete Inventory Management: How to Prevent Obsolete Inventory?

Effective inventory management is vital to reducing and eventually preventing obsolete inventory. Here are steps you can take to bring your inventory under control and prevent dead stock.

1. Accurate Demand Forecasting

Start with accurate demand forecasting to ensure you are stocking the right products and in the right quantities. Look into demand forecasting techniques, historical sales data, market trends, and seasonal patterns to improve the accuracy of your forecasts in the long run.

2. Ensure Maximum Product Visibility and Availability

Once you have a clear idea of the demand for a particular item, the next step should be to make sure the product is visible and consistently available. This involves displaying every item where customers can see it and ensuring inventory is regularly replenished at locations where the product generates sales.

3. Optimize Reorder Points

Preventing excess inventory is one way to ensure you don’t end up with dead stock. But you don’t want to run out when new orders come in. To successfully avoid both scenarios, make sure you understand optimal inventory levels and establish reorder points.

4. Track Inventory Levels

Perhaps the most important thing to keep your eye on is your inventory levels. It is something you need to do more frequently and in real time.

Inventory levels can change rapidly regardless of what industry you’re in. So, the only way to avoid dead stock and stockouts is to track and maintain optimal inventory levels, which is only possible through consistent monitoring.

In addition, consider your inventory’s performance history along with customer behavior, trends, and other insights when making purchasing decisions.

5. Regular Inventory Audits

Regular inventory audits are a must if you want to prevent items from becoming dead stock. These audits will tell you which one of your items is slow-moving or experiencing significantly reduced demand. When timed right and done frequently enough, these audits will help you change your sales and marketing strategy within time to ensure the consistent sale of your goods.

The key factors to track for these audits are inventory levels, inventory turnover rates, and turnover targets.

If you’re frequently facing the issue of slow-moving items, look for trends and patterns in your processes that may be the cause behind inventory buildup.

6. Track Supply Chain Data in Real-Time

You can track changes in your supply chain to understand how they affect your business. Having access to details like production timelines, warehouse receiving, lead times, and more, can help you gain a better view of the supply chain side and use it to your benefit. You can place orders at the right time to ensure your store is stocked at optimal levels and ensure your orders match customer demand forecasts.

7. Use Inventory Management Software

Using inventory management software can solve most of your inventory management problems. These tools could help you track real-time insights, forecast inventory needs, set reorder points, automate replenishment, track inventory levels, and much more.

Cloud-based tools like Nest Egg also allow you to store supplier and vendor contacts to facilitate smooth communication. It pulls up data within seconds, so you can access all the inventory and logistics information you may need.

Nest Egg can easily integrate with existing barcode scanning systems, eliminating the need to manually adjust your stock levels. The tool also allows you to track purchases, sales, and other adjustments to stock levels.

8. Strengthen Supplier Relationships

Strong supplier relationships ensure you will notice and act on market changes quickly. Inventory can become obsolete quickly, and communicating consistently with your supplier will allow you to adjust orders to avoid being stuck with dead stock.

Your business can also benefit from more flexible terms and faster response times.

What Should You Do with Obsolete Inventory?

It will take you some time to get these preventive measures right. But that doesn’t mean you have to sit back and just count your losses.

Here are some best practices when you have obsolete inventory on hand:

Remarketing

Use different marketing strategies to sell products that may still have sales potential. Just make sure you’re not investing a lot of capital in this approach.

Consider remarketing the product to a broader or different audience or on a different sales channel. A case in point is Patagonia, a Ventura, California based outdoor apparel company. In 2011, Patagonia launched the Worn Wear program, which encouraged customers to bring their used and worn-out Patagonia clothing for repair and recycling. They also began to sell refurbished and repaired clothing online. This not only reduced environmental impact of unused clothing by extending product lifespan but also provided new revenue stream from remarketing dead stock.

Offering Discounts

You may be able to sell some products at lower prices, which is better than writing them off as a complete loss. Consider running a flash sale or a one-time promotion to get products off your shelves.

If you have an extensive catalog of products, you can unload obsolete ones by bundling them with fast-selling items. An electronics retailer might bundle older model TVs with newer Blu-ray players or older Blu-Ray players with popular movie titles or TV series box sets.

Liquidating

Consider liquidating products if you cannot sell them with the above-mentioned strategies. Selling dead stock in bulk to wholesalers, liquidators or discount retailers may help you cover some of your losses. Working with liquidation companies that specialize in buying and selling excess inventory can be an option if you want to offload dead stock quickly and efficiently.

Donating

Donating obsolete products to charity or nonprofit is another option you can try. You can get a tax deduction while also contributing to a good cause. Some of these receiving organizations may distribute the donations to those in need or sell them in thrift stores to raise money. Donations can be a sustainable way to keep the stock in use rather than ending up in a landfill.

A case in point is IKEA, the Swedish furniture retailer. In 2015, during the peak of the European refugee crisis, recognizing the urgent need of basic necessities, IKEA decided to donate a significant amount of dead stock and unsold inventory to refugee camps and temporary shelters. The donations included beddings, blankets and kitchenware and other essential household items. This provided comfort and dignity to refugees who had fled their homes with little more than the clothes on their backs.

Writing Off

Writing off the items as a total loss in your financial statements is the only option left when you’re sure your obsolete inventory cannot be sold or given away to charity. Another reason to do this is that it reduces your tax liability. The write-off amount is typically the difference between the original cost basis and the estimated salvage value, if any.

Conclusion: Managing Inventory Better to Prevent Obsolescence

There are many ways businesses can reduce and prevent obsolete inventory. One of the easiest things to do is integrate robust inventory management software into your operations. It will help you put all the other tips into practice, too.

We hope this guide has resolved your worries and given you plenty of ideas to bring down your dead stock. Make sure to consider the unique features of your inventory, industry, and market when formulating your inventory management plan.

Good luck!