Minimizing Obsolete Inventory: A Crucial Aspect of Managing Inventory Levels

Inventory ties up the most cash for any product-based business—thus, it’s also an area with plenty of opportunities for savings.

The U.S. Census Bureau says that at the end of July 2020, the total business inventory/sales ratio, based on seasonally adjusted data, was 1.33. That means that, as July ended, U.S. manufacturers and retailers were holding approximately $1.33 of inventory for every $1 in sales.

Inventory management is an essential part of running a successful business. While it might sound like a tedious task, it plays a crucial role in maintaining a healthy cash flow and ensuring that a company can invest in growth initiatives. One of the most significant challenges businesses face is dealing with obsolete inventory.

Obsolete inventory, also known as "excess" or "dead" inventory, refers to stock that a business can no longer sell or use due to a lack of demand. It usually becomes obsolete after a certain amount of time passes, and it reaches the end of its life cycle. Products that become obsolete or dead go through multiple stages before becoming unsellable, starting as slow-moving inventory, then becoming excess inventory, and finally turning into obsolete inventory.

Minimizing obsolete inventory is a crucial aspect of managing inventory levels. It's a function of inventory best practices and analysis techniques that optimize purchasing and inventory management, also known as material requirements planning (MRP). The amount of obsolete inventory a company has is an important indicator of whether it needs to reevaluate its business strategy or optimize its inventory management practices.

Obsolete inventory can lead to major cash flow problems and can hurt a business's ability to weather a rough patch. If a company with slim margins consistently finds itself with obsolete inventory and doesn't address the problem, it could end up in a deep hole. Since obsolete inventory is stock a company can no longer sell, it can negatively affect a company’s overall financial health. The business has already invested money and, in the case of manufacturers, time in these goods and can no longer recoup those costs—and the longer you store the unprofitable inventory, the more money it will end up costing.

As much as 20% to 30% of business’ inventory is obsolete at any given time, and they may write off most or all of those goods as a loss. That’s a big number and could represent the breaking point for a struggling organization.

To avoid these problems, businesses must come up with their own parameters for when different types of inventory become obsolete. One of the first steps in minimizing obsolete inventory is to start with industry-specific standards to build guidelines for when inventory items should be categorized as slow-moving, excess, and obsolete. There are several reasons why inventory could become obsolete, including problems with the product, poor forecasting, inventory management shortcomings, or other issues.

High rates of obsolete inventory can ultimately affect profitability and the long-term viability of a business. As the financial health of an organization declines, that damages its ability to attract investors or qualify for loans. Obsolete inventory also shows up as an expense on the balance sheet, one of a company's most important financial documents.

It's important to address obsolete inventory quickly and efficiently to minimize its negative impact on the business. One of the best solutions for obsolete inventory is liquidation. Liquidation involves selling off inventory to a third-party company that specializes in buying and selling excess inventory.

Liquidation allows businesses to recoup some of the costs associated with obsolete inventory and free up valuable warehouse space. It's often the best option for businesses because it's fast, efficient, and can help prevent further losses. Liquidators have the knowledge and expertise to evaluate the inventory and determine the best way to dispose of it. They can also help businesses avoid the cost and hassle of managing the inventory themselves.

In conclusion, managing inventory levels is crucial for a business's success, and minimizing obsolete inventory is a critical aspect of that. While there are many reasons inventory can become obsolete, liquidation is often the best solution for dealing with excess inventory. By addressing obsolete inventory quickly and efficiently, businesses can maintain a healthy cash flow, avoid long-term financial damage, and focus on growth initiatives.