Every product has a specific lifecycle. At the end of the cycle, the product loses its usability. The inventory which has no additional usage or sales capability because it has reached the end of its product lifecycle is called obsolete inventory. It causes losses on company’s balance sheet and overall profitability in many cases. For example, Company A is a bread manufacturer. They made a batch of 10000 packets of bread which will lose their edibility after 31st January. The company was able to sell only 8000 packets, but the remaining 2000 packets of bread are sitting in the warehouse. When 31st January will come, the bread will no longer be sellable. These 2000 packets of bread are obsolete inventory.
Causes of obsolete inventory:
It is not true that inventory can’t go waste and matured stock can be sold always at a point in the future. Obsolete inventory which is also known as dead inventory loses their salability as a result of reaching at the end of its life cycle. It can’t be sold in the future as it is no longer edible. As one of the most costly inventory expenses, it can cause an extreme loss of a business. The prime causes for obsolete inventory can be as follows –
- Inaccuracy in forecasting: In the case of production of any good, you must think about the demand of the product as well as your salability. Excessive production of a good can turn into an obsolete inventory which as we know is not good for your business. Not only in the case of amount of production should be accurately forecasted but as well as the acceptability of the product in present and near future to the customer. If you are thinking of launching a product in the market, you also must think about how long the consumers will keep buying it in the future. When production and forecasted sales of product don’t match obsolete inventory takes place.
- Poor quality: Why people should buy your product if you can’t assure them proper quality? Now product market is about quality. Even a newly invented advanced product can also be failed if the quality is not maintained. Lower quality leads to declined selling which has a huge possibility of ending up in obsolete inventory.
- Inadequate inventory management system: Manually tracking and planning company’s future orders have the higher possibility of error as well as a time-consuming process. You should use an inventory management system to track your stock levels. This will allow your company to safeguard against inventory surpluses that can turn into obsolete inventory.
- Long lead time: inefficiency in a supply chain can produce long lead time and can cause your company to accumulate excess inventory. Reduced lead time is helpful for streamlining your supply chain. It helps to decrease you the amount of stock you need to keep in storage. Proactively shortening your lead time will prevent your company from carrying a large amount of obsolete inventory.
Obsolete inventory is nothing good for the business. Because the unsalable product is nothing more than a burden for the company. But if cautious actions are not taken properly it can cause you lose which definitely won’t be helpful for the growth of your company.