How to identify obsolete inventory

Likewise, if a company produces a product that is no longer in demand, its inventory of it becomes obsolete and must be cleared out. This can happen with technology products such as laptops or smartphones, where newer models come out every few months. Competitors don’t always need to advance the technology to make your product obsolete. A new brand with a better price or better marketing may be enough to disrupt your market.

• If your warehouse consists of items that are no longer in fashion, it could quickly become stale inventory.
• If a product doesn’t live up to their expectations, they won’t return to buy more of the product and may even write poor reviews that will keep others from purchasing the product.
• Slow-moving inventory still has some value but sells at a much lower rate than is optimal.
• In many cases, this inventory is no longer being produced or sold by manufacturers, making it difficult or impossible for retailers and distributors to move these products.
• To liquidate inventory, you’ll want to work with a surplus reseller specializing in moving “unwanted” inventory.

Generally Accepted Accounting Principles (GAAP) rules require you to account for the loss promptly in your bookkeeping. Plus, visual inventory systems like Sortly allow you to see what you have on hand—an extra helpful tool when determining whether certain items are at risk of becoming obsolete. Unlike running a sale on bundling inventory, liquidation will not aim to cover costs. Businesses don’t set out to purchase inventory they know will become obsolete. Rather, purchasing decisions and market conditions are what typically, inadvertently causes goods to become obsolete. Known as obsolete inventory, holding on to purchased inventory that is no longer sellable can significantly harm your bottom line.

Utilise inventory management software

If you have fast-moving merchandise with long lead times, always keeping an amount of safety stock on hand will mean you don’t run out and disappoint customers. Inventory is at the heart of an online business, so it’s important to have access to data that provides insights into how well your supply chain is performing. Obsolete inventory is usually caused either by a lack of consumer demand or because a business purchased too much of a product. Consumer demand may decline because the product is poorly made, irrelevant, untimely, or already saturated in the market. For young businesses, avoiding obsolete inventory could be a critical step on the path to stronger unit margins. With ShipBob, you can split inventory across our international fulfilment network and easily track and manage inventory in real time all through ShipBob’s user-friendly merchant dashboard.

The store is able to charge more for the set once they add champagne—and customers continue to purchase the bundle. Best of all, the company is now covering its costs and has avoided a write-off altogether. When it becomes obsolete, that amount is reduced by the value of the obsolete stock. At the same time, it’s also recorded as an expense on the income statement. Growing numbers of retailers use the term deadstock to refer to obsolete stock which has become collectable. Sneakers are a great example, where customers are willing to pay a heavy premium to grab a limited edition pair.

• If a product is no longer in high demand but still has some value, there’s a good chance you can sell it.
• If it then sells, you debit ​$10​ to Inventory Reserve and credit ​$10​ to Inventory.
• If a particular car model is no longer being produced, the parts that go with it become obsolete and cannot be sold.
• This should help your team order confidently, practice tighter inventory control, and quickly estimate the value of inventory you have on hand.

Inventory liquidation is the process of selling off undesirable inventory at a significant discount in exchange for cash. Though there are several great inventory forecasting solutions on the market, you can always rely on a 3PL to provide the insights you need to better forecast demand without the extra cost. If items still have sales potential in a specific market, you could rethink your marketing strategy.

How to Account for Expired Inventory

Any product that a business can’t sell can cut into profit margins and disrupt the supply chain and fulfillment operations of any brand. Not only is this much preferred to disposing of the items, but it can make organizations eligible for a tax deduction equivalent to the cost of those products. This option is more relevant for retailers and distributors that sell finished goods, rather than manufacturers or suppliers that work with raw materials. In most industries, there are liquidators that buy leftover inventory at a steep discount and then resell it. This is a good option if you tried remarketing, discounting and bundling and it didn’t move enough product. While the price liquidators pay may be at or below cost, it’s still better than writing-off obsolete stock as a loss.

How to identify obsolete inventory

Software can trigger alerts for purchasers when it’s time to reorder, but supply chain employees need to be on the lookout for a surge or drop in sales of a certain inventory item. The Flowspace Network is among the largest networks of FDA-registered warehouses in the country, which means that a company can store its physical inventory closer to customers and reduce shipping times. Flowspace offers full lot tracking and reporting capabilities in line with FDA and ISO regulations and certifications. An inventory tracking system that offers real-time and regular updates provides actionable inventory data to help you make informed stock decisions. Flowspace offers industry-leading fulfillment solutions and ecommerce software that powers insights and efficiencies for merchants selling online and ensures effective inventory tracking. The Flowspace platform offers real-time visibility into orders, inventory, and more, and offers easy-to-implement control over supply chain systems.

Poor Product Quality or Design

In order to make any of these review systems work, it is necessary to create policies and procedures as well as ongoing scheduled review dates. By doing so, there is a strong likelihood that obsolescence reviews will become a regular part of a company’s activities. Another Board policy should state that management will actively seek out and dispose of work-in-process or finished goods with an unacceptable quality level. By doing so, goods are kept from being stored in the warehouse in the first place. A final source of information is the preceding period’s obsolete inventory report. The accounting staff should keep track of these items and notify management of those for which there is no disposition activity.

In this way, you will have enhanced product visibility, thus avoid having excess inventory at the same time. The moment you feel you are dealing with a slow-moving inventory, you should take actions. Apart from trying to sell using strategies such as bundling, discounts, and remarketing. Dead inventory warns investors that the company may have poor inventory management, second-rate products, or inaccurate management forecasts of demand.

Not only does too much excess inventory cut into profit margins and cash flow, but it can also limit the chances of getting a business loan. It can be symptomatic of poor products, poor management forecasts of demand, and/or poor inventory management. Looking at the amount of obsolete inventory a company creates will give investors an idea of how well the product is selling and how effective the company’s inventory process is. While this trend seems obvious, inventory tracking might also help the same brand detect a smaller demand increase around the end of the year when people might be taking tropical vacations. For example, there are companies in the aerospace industry that do a good business by inventorying seldom used parts.

This system helps to have updated stock information per each sales transaction. The same is true if you start using automated eCommerce business automation for the overall management control. It includes other problems besides obsolescence, such as spoilage and theft losses. If you write down ​$10,000​ of inventory to ​$2,000​, you make an Inventory Reserve journal entry for ​$8,000​.

Slow-moving inventory still has some value but sells at a much lower rate than is optimal. Obsolete inventory has reached the end of its product lifecycle, that is to say, it hasn’t been sold or used in a long time and is unlikely to be in the future. Since GAAP mandates immediate recognition of any obsolescence as soon as it is detected, you may have a struggle enforcing immediate recognition over the objections of management. By taking a look at historical data, you can predict future demand for each SKU and make informed decisions to avoid purchasing too much of an item that might become obsolete faster than it can be sold. The best way to identify obsolete inventory is by implementing the right tools, technology, and processes to identify slow-moving inventory on hand. This includes having insights into production lead times, labor needs, warehousing, order fulfillment, and shipping.

For most ecommerce business, having enough inventory to meet demand is often a top concern. Would you like to learn more about licensed real estate agents obsolete inventory and other types of inventory? Ordoro offers everything you need to sell your products online or in person.