Avoiding Obsolete Inventory

Why do so many companies have difficulty disposing of slow-moving inventory? Inaction can be costly.

If It’s Not Selling

I’ve worked for or consulted for a few companies that seemed to struggle greatly with inventory control. Frequently they simply hated to acknowledge that certain items were not selling. Interestingly these same companies also often tended to have past-due accounts receivable and cash flow problems. Putting off dealing with things is commonly the culprit. See Focus on Staying Current for some thoughts on this.

Since this article is specifically concerning inventory, let’s look at how so many companies are falling short in avoiding obsolete inventory.

So, again, the culprit is sometimes that management simply does not want to face up to the fact that something they offer is simply not selling. Maybe it’s pride, but for some reason they want to keep holding on to items that time has shown are not going to sell sufficiently to warrant carrying them.

Poor Inventory Tracking

I recall a client a number of years ago that had some inventory that had been sitting in the warehouse for several years. They client had originally bought the items at what was supposedly a “bargain”. Yeah, some bargain. As it turned out, no customers wanted them then and time had done nothing to change that. In the interim the cash spent to buy these items remained tied-up in obsolete inventory and unavailable for other uses; like buying things that customers actually wanted. Here is where poor inventory tracking comes into play. It was only at year end when inventory was counted that everyone was reminded that this inventory was still sitting there. Perhaps the rest of the year the dust on it was so deep nobody could see it. Of course, with a good inventory reporting system all this obsolete inventory would have been seen in the records on a regular basis. That doesn’t mean anything would have been done, but at least the problem would remain visible.

Delay is Costly

Whenever inventory becomes obsolete or is getting close to that status, it pays not to delay in disposing of it. If it is still sellable, but at a lower price, then put it on sale and get what you can. Even selling something for its scrap value gets some cash back, but the longer you wait the greater the likelihood that this is exactly what will happen or perhaps it won’t even have scrap value.

Stay on Top of Inventory

One of the best ways of avoiding obsolete inventory is to review inventory records on a regular basis. That means knowing what is selling well, what is selling poorly, and what is barely moving if at all. Know the items that constitute the bulk of you inventory value and the ones that are responsible for most of your sales. Here is a great time to use the 80/20 rule to identity the approximately 20% of items that make up 80% of your sales. Likewise, you can use this same rule to identify the 20% of items that make up 80% of the dollar value of slow-moving inventory.

Here is the key. Take action. If something is not selling at all or selling extremely slowly, establish a plan to get rid of it before it becomes obsolete.

For some additional ideas on inventory management, see 3 Low Cost Sources of Cash – Part 1 and Small Inventory – Big Benefits.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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