The Pain of Obsolete Inventory
The High Cost of Obsolete Inventory
You purchased high levels of inventory to cover long lead times of overseas shipments and to leverage quantity discounts. You wanted to provide your customers with high service levels by always having their parts in-stock… and then it happened. Market forces drove the monthly demand of some of your inventory down substantially. Now you find yourself sitting on, in some cases, more than a year’s worth of inventory.
Excess and obsolete inventory for manufacturers can be 15-20% of stock. Warehouses often expect 15% of products to be returned, rejected or become obsolete. The total cost of this inventory can be as high as 25% when considering the cost of the storage, shrinkage, damage and the time value of money.
The impact of excess and obsolete inventory is felt the greatest when thinking about the amount of cash that is tied up in product that can’t be sold to customers. In many cases, this inventory sits tucked away in a dusty corner of the factory or warehouse for extended periods of time. It rarely becomes supply chain’s top priority to relieve the company of this burden.
5 Ways to Dispose of Inventory
First and foremost, ensure your inventory is safe for disposal. If it can pose a liability in any way, seek expert advice before proceeding.
Find a customer or distributor who may want it. Sometimes when products become obsolete, there are companies that wish to run their old equipment for as many years as possible. If you’re carrying obsolete parts for their old equipment, they may be a possible buyer for those parts.
Modify the parts to make them usable for something else. Sometimes a fitting or internal component change can make the parts useful for another product or a new product. For this option, weigh the cost of the modifications against the value of the obsolete parts. If it’s going to cost $25,000 to modify $5,000 worth of obsolete inventory to be able to sell it for $10,000, then…
Auction off the parts. If you need to dispose of the inventory quickly or the cost of modifications doesn’t make sense, you may be able to hire an auction service. Again, weigh the cost of this action against the value of the obsolete parts.
If your inventory is a multi-part unit, can the unit be taken apart to salvage any useful parts from it? Does the value of the salvaged parts make it worth the cost of the labour to conduct this action?
Donate to a charity to obtain a tax credit. This option is more applicable to people with finished goods inventory. It is far less likely to be an option for a manufacturer carrying parts inventory. Check out EAL Green as one example that has been used by manufacturers. They use the money they generate to create student scholarships.
I’ve listed 5 ways above. If you’ve exhausted the options above and you’re reading #6, it means you may need to walk into your accountant’s office and ask, “How do we write off scrap?”
Tracey Smith is a recognized analytics expert, speaker and author. She is the President of Numerical Insights LLC, a boutique analytics firm addressing the needs of businesses large and small. If you would like to learn more about using data for better decision-making, please visit www.numericalinsights.com or contact Tracey Smith through LinkedIn.