What does obsolete stock mean

The event was attended by 25 executives from a variety of different industries and backgrounds. I nventory Management Partners sponsored the event, and helped to bring together the format and content for the discussion. The objective of this session was to openly discuss some of the challenges that exist in managing this over-looked asset, and begin to shine a light on approaches that can be more effective in dealing with the issue. In the end, excess and obsolete inventory occurs because of mistakes, mis-aligned decision-making, and lack of consideration of the cost of inventory in countless decisions, including product design, sales forecasting, sales and operations planning, and lack of awareness. The following issues are some of the suggestions executives identified.

Excess and Obsolete Inventory: You’re All Responsible for It!

There is no doubt that obsolete inventory is a real threat to your retail business. You only need to consider the consequences to know that. In that case, you need to know how to manage your stock efficiently. According to Investopedia, obsolete inventory is merchandise that has not sold for a long time, and there is no expectation that it will sell in the future.

Other terms used to describe it include dead inventory, excess inventory and aged stock. As a result of not selling it, it becomes a burden to you since your capital is tied up in stock. There is also no chance of selling it at the price at which you initially listed it, which means you'll undoubtedly lose money.

More than that, this stock occupies valuable shelf and floor space that would otherwise hold merchandise that sells.

Knowing that, you can immediately understand the problem that is dead stock and why you must identify it. Download your free copy of our Floor Planning Ebook. For one, it can happen at the end of a season. For example, you sell sports equipment, and by the end of summer, you still have swimwear merchandise which has failed to sell. Another reason for it happening is as a result of deranging or discontinuing SKUs.

For example, your supplier discontinues a product suddenly. In response, you might think you need to take the product off the planogram immediately. If you take a discontinued product off your planogram, all you will end up doing is to ensure that you sit with excess stock in your storeroom. The first thing to do - a core point in managing your inventory - is to learn and understand your days of supply.

Other actions include setting up regular range reviews so that you can replace old merchandise with new stock. You can look at completing various shelf planning exercises, allocating shelf space according to the rate of sales. You can even make use of planograms to pinpoint any aged stock. In fact, even seasonal clothing has a specific period in which to sell before you need to replace it.

Meanwhile, for another retailer selling different merchandise such as electronics or kitchenware, the time frame could be as long as 13 months. Instead, you need to find a way to manage it. The best way to do that is to follow the proper product lifecycle. For that to happen, there is a concept known as product lifecycle management. Of course, the product can stay on your planogram.

In fact, it should remain. However, once you either decide to delist an SKU, or a supplier has discontinued it, you need to set up a trigger that will stop your replenishment engine from ordering more of that particular stock. In essence, the rule allows your stock to deplete naturally before removing it from your planogram altogether. Once your stock levels are low enough, you can place the balance of those products in bulk stack displays. That includes using dump bins, sales displays and marking down your stock.

As a side note, when marking down your inventory, you want to find the balance between getting rid of it and making as much money as you possibly can.

You could also bundle different products together to get rid of them. That might mean offering to do a similar size order with them to compensate for returning the stock. If all of the above fails, you might have to face the cold hard reality that is stock loss, writing it off and recording it in your books as an expense.

Subscribe To Our Weekly Newsletter. Subscribe Here! Featured Post. Recent Posts. Planograms Inventory Management. What is obsolete inventory and why does it happen? Of course, the above only forms one part of its definition. Download your free copy of our Floor Planning Ebook That said, you also need to understand the reasons why it happens. How can you identify obsolete inventory? Fortunately, there are a few actions you can take to pinpoint this type of stock.

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Obsolete stock then sits on a company's balance sheet as working capital Many companies are unsure what to do with obsolete stock and. Inventory items replaced by an alternative and rendered unusable or diminished in value. They have either to be discarded or sold at a highly discounted price.

The word "obsolete" refers to assets of different kinds, and the term, in general, has several meanings. The term "obsolete" comes from the Latin for "grown old, worn out. But, of course, something can become worn out and discarded. Equipment, machines, or vehicles can become obsolete. Laws and regulations can be out-dated.

Whether you are in retail, the supply chain, or are a manufacturer you have inventory. Obsolete inventory can adversely impact your bottom line.

Mature stock cannot always be sold at some point in the future. Obsolete or dead inventory is stock that can no longer be sold because the product has reached the end of its life cycle.

Accounting for Obsolete Inventory

Obsolete inventory is a term that refers to inventory that is at the end of its product life cycle. This type of inventory has to be written down and can cause large losses for a company. If the inventory is held for too long, the goods may reach the end of their product life and become obsolete. Obsolete inventory is inventory that a company still has on hand after it should have been sold. A write-down occurs if the market value of the inventory falls below the cost reported on the financial statements.

Five Causes of Obsolete Inventory

To record inventory obsolescence, the company would make the following journal entry:. Cost of goods sold represents an expense account while allowance for obsolete inventory is a contra-asset account. The allowance for obsolete inventory account is reported in the trial balance below the inventory account. When the inventory write-down is small, companies usually charge the cost of goods sold account. However, when the write-down is large, it is better to charge the expense to a separate account. On July 2, 20X2, the company disposed obsolete inventory. Scenario 1 : On July 2, 20X2, Obsolete Company decided to dispose obsolete inventory by throwing it away in the dumpster. The company would make the following journal entry:. Scenario 2 : On July 2, 20X2, Obsolete Company decided to sell the obsolete inventory through an auction.

No matter how lean your operation is, your company will likely end up with excess inventory at some point. The culprit may be purchasing too much or overly optimistic forecasting.

There is no doubt that obsolete inventory is a real threat to your retail business. You only need to consider the consequences to know that.

Obsolete Inventory

Any business that carries inventory runs the risk of having it become obsolete. This may occur for a variety of reasons, including expiration of a physical good or erosion of demand for the product itself. While determining a product to be obsolete is somewhat subjective, the rules for dealing with the cost of obsolete inventory once it is identified are more defined. Obsolete inventory is defined as inventory that has reached the end of its useful life -- in other words, it cannot be sold as a finished good. This may occur for a variety of reasons depending on the industry. An obvious example would be a food product that has passed its expiration date. In other cases, the good may be functional but all foreseeable demand has been satisfied, possibly due to the introduction of newer products, therefore there are no expected future sales of the product. The largest gray area in the question of accounting for obsolete inventory is when to recognize it as obsolete. The generally accepted practice is to hold a meeting known as a material review board to formally disposition the product as obsolete. However, the material review boards are not required to be held on a set schedule and therefore extended periods of time might lapse between them, during which significant amounts of obsolete inventory may have accumulated. Additionally, in cases where the primary determinant of obsolescence is the prospect of future sales, a judgment call must be made on whether the company ever expects to sell the product. Per generally accepted accounting principles, or GAAP, a company must recognize the costs associated with obsolete inventory fully in the period in which they are identified by a material review board.

The CFO'S Perspective

The simplest way to identify obsolete inventory without a computer system is to leave the physical inventory count tags on all inventory items following completion of the annual physical count. The tags taped to any items used during the subsequent year will be thrown away at the time of use, leaving only the oldest unused items still tagged by the end of the year. You can then tour the warehouse to see if an obsolescence reserve should be created for them. However, tags can fall off or be ripped off inventory items, especially if there is a high level of traffic in nearby bins. Though extra taping will reduce this issue, it is likely that some tag loss will occur over time. Even a rudimentary computerized inventory tracking system is likely to record the last date on which a specific part number was removed from the warehouse for production or sale. By sorting the report with the oldest last usage date listed first, you can readily arrive at a sort list of items requiring further investigation for potential obsolescence.