Managing Obsolete Inventory: Strategies, Causes & Prevention Tips
Balancing Act: Navigating between too much and too little inventory is challenging but crucial.
Stock Smarts: Knowing how much inventory to have is key to effective management.
Strategic Inventory: An effective strategy helps maintain the right inventory levels.
Goldilocks Principle: Avoid extremes—find the just-right amount of inventory.
Effective Management: Proper inventory management strategies are vital for business success.
There’s a fine line between having too much inventory and not enough—one of the key reasons that a proper inventory management strategy is so important.
Too little inventory can lead to stockouts, while too much can lead to obsolete inventory, or obsolescence.
When you’re unable to sell certain products, and they become obsolete, you end up having to mark that dead stock as a loss, which can greatly impact your ecommerce business’s bottom line.
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Throughout this article, we’re going to address what inventory obsolescence is, the negative impacts it can have, and processes you can put in place to reduce the amount of products (and money) you lose due to excess and obsolete inventory.
What is Obsolete Inventory?
Obsolete inventory refers to stock that a business can no longer sell due to a lack of demand.
While this might also be referred to as slow-moving or excess inventory, obsolete inventory actually takes this a step further.
Let’s look at an example.
You’re running an athleisure apparel store—we’ll call it Casual Jack’s—and you stocked up on a certain style of men’s joggers when they were trending.
However, you’ve started to notice a steep decline in sales for this specific style of joggers.
This product is becoming “slow-moving inventory,” a term that typically refers to products that haven’t had much movement from shelf to cart in around six months or so.
Then, if the product remains unpopular, seeing little to no movement for an entire year, it becomes “excess inventory.”
Finally, once the product is no longer selling, and it has been more than 12 months, it has turned into obsolete or dead inventory.
This is inventory that simply will not sell, likely because (at least with regard to our joggers in question) it’s now gone out of style and a new trend has emerged.
The journey toward obsolescence
Here’s a quick table to understand how the obsolescence journey works:
| Inventory type | What is it? | Indicators | Management strategy |
|---|---|---|---|
| Slow-Moving Inventory | Inventory that has been on hand and seen little movement (i.e., purchases) in 6 months. | Low sales velocity, higher stock holding costs, still potential for future demand but needs intervention. | Offer discounts or promotions, consider bundling with faster-moving products, re-evaluate forecasting. |
| Excess Inventory | Inventory that has been on hand and seen little movement in 12 months. | Overstocked, beyond forecasted demand, tying up working capital, but still potentially sellable. | Adjust future orders, initiate clearance sales or seasonal promotions, consider alternative sales channels. |
| Dead Inventory | Inventory that has not sold for 12+ months and is unlikely to sell in the future. | No sales activity, becoming obsolete, and may no longer be relevant to market demand. | Write off, donate, recycle, or dispose of inventory; prevent recurrence by improving demand planning. |
Retail industries like apparel, electronics, and furniture can be particularly vulnerable to obsolete inventory due to how quickly things can go out of style and new tech and styles can emerge.
However, no industry or ecommerce business is completely safe from obsolescence.
Financial impacts of obsolete inventory
Obsolete inventory can have some major financial repercussions for your business, impacting your current assets, your cash flow, and more.
When inventory items become obsolete, they must be written off as a loss on your income statement. This reduces your net income and impacts your overall cash flow immediately.
Not only that, but your balance sheet is affected, and your inventory value abruptly decreases as well, impacting your current asset valuation.
Plus, the more space this dead and excess stock takes up in your warehouse, the less storage space you have for products that are actually selling.
Long story short: obsolete inventory is going to lead to a bad time.
This is why you’re here, and why we’ll be introducing you to a few strategies you can use to reduce your inventory obsolescence later on in this article.
Examples of obsolete inventory
Let’s look at our athleisure store example, Casual Jack’s, again.
Like we mentioned, there was a style of joggers that suddenly began trending due to a famous football player being seen in them.
To keep up with customer demand—and be on trend—Casual Jack’s ordered 10,000 units of the joggers.
They sold 8,000 units before the trend died down, leaving 2,000 units of obsolete stock.
If those 10,000 units cost $20 apiece, that’s a total investment of $200,000. That means with 2,000 units remaining, Casual Jack’s is left with an obsolete inventory value of $40,000.
That dusty stack of joggers is now a costly reminder of yesterday's trends (cue the sad violin music).
Now let’s pivot and take a look at another type of business—this time, a bakery called The Hot Croissant.
The bakery made 100 pastries to sell by the end of the day, as theirs is a type of perishable inventory. When closing time comes around, there are 10 pastries remaining.
The Hot Croissant has calculated that it costs $5 in ingredients and labor to make each croissant.
So out of a total of $500, they’re left with an obsolete inventory value of $50.
According to the Generally Accepted Accounting Principles (GAAP), those losses must be immediately written off—which, as we mentioned, can have some serious financial consequences for a business.
What are the Causes of Obsolete Inventory?
There are a number of reasons that obsolete inventory can occur.
Understanding where excess inventory can come from is the first step in stopping it. So let’s introduce you to a few reasons that businesses end up having to write off dead stock.
Technological advancements
We see this happen often in tech-related companies, where new advancements cause people to want the latest and greatest thing, leaving older products in the dust.
Think about companies like Samsung and Apple, that release new versions of their products every year or two.
They have to be strategic about when to time those new releases to ensure that they don’t end up with warehouses full of obsolete items.
Smaller companies, like a small-town electronics retailer, need to ensure they’re not overstocking items that could become outdated at any moment.
Shifts in consumer preferences
This cause of obsolescence relates back to our example from Casual Jack’s.
While it can be difficult to pinpoint just how many products you’ll need due to a trend, shifts in consumer preferences can be a big reason that certain stock goes dead. Just like how our trending joggers went obsolete as soon as the trend went out of style.
The best thing you can do is pay attention to patterns from previous trending products to see if you can find a sweet spot in how much stock to order.
Inaccurate inventory forecasting
Poor demand forecasting can be another leading cause of obsolete inventory.
If your team is inaccurately forecasting customer demand based on historical sales data and market trends, you can end up with way more of a product than is realistically going to sell.
Make sure your team is properly trained on how to forecast inventory so that stock levels can be easily maintained and won’t end up causing a loss down the line.
Increased competition
If a new competitor has opened up that’s taking away sales, this can also be the reason a company’s inventory might become obsolete.
Something like this can often be unavoidable, especially as new company launches can cause temporary disruptions in the market.
However, you can try to combat some of this unavoidability by reacting to that new competition through sales, discounts, and other ways to keep customers coming back to you.
Regulatory changes
If regulations are being updated within your industry, it may make past stock unsellable due to new regulatory changes.
For example, the healthcare industry has strict guidelines for companies to follow. A product and its sellability could be impacted if those guidelines change in a way that makes said product unusable.
Keep your thumb on the forefront of industry news so that you can order less of any product that may be impacted in the near future.
You just may need to keep reordering more frequently than usual to ensure you don’t end up with too much dead stock after new regulations go through.
Poor inventory management
Having a poor inventory management system can also lead to an increase in obsolescence.
Without the proper tools, like inventory management software, it can be tough to track inventory. This leads to over-ordering because you don’t have an accurate view of your inventory count.
It’s important to improve your inventory management processes for a number of reasons, one of which is, of course, to reduce your inventory reserve.
Bad product design
Finally, a product could become obsolete simply because it’s not a very good product.
If this happens, the best move is to learn from customers what they don’t like about the product.
Use their feedback to improve in the next iteration—or try again with something better.
How to Identify, Manage, And Reduce Obsolete Inventory
As much as we want to avoid it, obsolete inventory is part of running an ecommerce business.
In fact, some studies have shown that even well-run companies tend to operate with an average of 20-30% in obsolete stock.
With numbers like that, you’re going to have some level of dead stock.
The important thing is to put processes in place that will help identify, manage, and reduce the amount of inventory you have to write off.
Here are 10 strategies that can help you identify and prevent inventory from becoming dead stock.
1. Utilize inventory management software
The foundation of every ecommerce brand’s inventory management is the right software.
With great inventory management software features—and a team trained to use them effectively—you’ll have a much clearer idea of when certain products are rapidly losing momentum in the market.
There are endless benefits to inventory management software, and having a clear eye on the products going in and out of your warehouse is undeniably a big one.
Find the right option for your brand by checking out our shortlist of the best inventory management software out there.
2. Accurately forecast demand
As we previously mentioned, inaccurate inventory forecasting can in part be a big reason for stock going obsolete.
So putting the tools and processes in place that help improve this accuracy can be a great way to reduce your overall obsolescence rate.
A few tips for improving your forecasting include:
- Looking at historical data to see if any trends emerge from year to year or quarter to quarter
- Using market research to gauge customer sentiment around certain products, trends, styles, or tech
- Collaborating with supply chain partners to jointly forecast inventory needs
- Paying attention to seasonal trends as well as cultural trends that can impact short and long term needs
By accurately forecasting demand, you can ensure you’re not overstocking products that simply aren’t going to sell.
3. Analyze sales data
By looking through your historical sales data and conducting regular analyses, you should be able to identify trends as some product sales start to stall.
Keeping an eye on sales data should help you pinpoint potential excess stock early, before it becomes completely obsolete.
In instances like this, you may be able to write down the inventory at a discounted price, rather than having to completely write it off.
Pay attention to market value so you can still get as much for the product as possible, minimizing your company’s loss.
To properly analyze your sales data, you’ll want to use tools like:
- Inventory management software
- Sales reports
- Trend analysis reports
- Inventory turnover ratio
- Inventory tracking data
These tools and reports can help you identify downward trends with certain products, shifts in customer demand or preference, and other issues.
By keeping track of this sales data, you can adjust inventory levels to minimize potential obsolescence. You'll also identify which products need to be marked down or removed altogether.
4. Monitor the product lifecycle
Another way to identify obsolete inventory is by keeping track of the product lifecycle. Product lifecycle management (PLM) software can be a big help with this.
The product lifecycle refers to each stage that a new product goes through. Starting from its introduction onto the market or your brand, all the way down to its decline in demand and subsequent obsolescence.
At the start of a product’s lifecycle, demand will be high, and your focus will be spent on finding the right reorder points so that you can avoid stockouts.
As a product progresses through its life cycle, demand can stabilize and decline as interest wanes.
As this happens, your business needs to remain aware so that it can adjust its order management processes and stop ordering as much of that product—or stop ordering it altogether.
Because if you don’t, you can quickly increase the amount of obsolete products you end up with once customer demand completely diminishes.
5. Conduct regular inventory audits
An inventory audit is a full count of all of your inventory levels.
While the full audit typically occurs just once a year, getting into the habit of conducting regular cycle inventory counts (like an ABC inventory analysis) is key to staying on top of your inventory account.
Cycle counts should be done as frequently as possible, but at the very least, once each quarter.
As you’re conducting your inventory count, pay attention to products that appear to have low turnover rates or that have suspiciously high levels of inventory.
Barcode scanners and other real-time inventory management systems can also be a big help with this.
By identifying low turnover or high stock levels, you’re able to identify potential areas of obsolescence. You can then mark down the products, reducing profit margins but not yet taking a loss, in hopes that you’re able to sell it before it’s completely dead.
6. Review inventory aging reports
An inventory aging report is a financial document that provides key details like:
- How long inventory typically spends in your warehouse before it’s sold
- Warehousing and carrying costs of your inventory
- The source of each product in the warehouse
- The inventory management approach used for each product
By reviewing these reports, you’re able to find out which products are spending entirely too much time on shelves before they’re being sold.
This increases their risk of obsolescence, meaning you can likely order smaller amounts of inventory at a time.
7. Communicate with suppliers and customers
Having a good relationship with your suppliers means that you can ensure you always have access to the latest and greatest product options.
And, you might be able to have your thumb on when new products or technological advancements are being released.
This can give you an edge in avoiding some of your products going obsolete.
More than that, you want to keep open lines of communication open with your customers.
This can help you gauge sentiment around certain products so that you learn well ahead of time when trends are passing and stock is losing popularity so you can stop reordering products.
8. Remarket or repurpose items
While a product might not meet demand for its original intended purpose, consider trying to remarket it to a new audience or repurpose it so that it can fit a new and different demand.
This is a great way to avoid having to write off—or even write down, given market value and demand—your remaining products.
Brainstorm with your product and marketing teams to see if anyone has any ideas for repurposing your inventory.
One great example of this is Play-Doh.
Play-Doh started out in the 1930s as a product that could remove coal residue from wallpaper. However, as homes shifted towards oil and gas furnaces in the 1950s, demand began to drop, and the company was facing obsolescence.
Until they discovered that art teachers were using the product as modeling clay.
The company made its product more colorful, shifted its marketing strategy, and now remains as a hugely successful brand today.
9. Offer discounts and bundling
And finally, we have one more option before you might need to consider writing off your inventory entirely. The last exit could be offering discounts, dropping prices, or bundling less popular products with more popular products.
Promote a sale or discount code for your obsolete products, or offer them as part of a bundle with a similar product to see if you can sell more of them at a lower price before having to write them off.
Bundling can be a great option as it increases sales opportunities for more products, even as you offload any excess stock. Your slow-moving product is seen as a bonus for a great price.
Add these discounts and bundles to your marketing strategy as a way to generate excitement about the products again.
10. Consider donation
Finally, if the products are well and truly not selling, no matter what other tactics you’ve tried, consider donating them to a charity.
This can give you a tax break, making it so that the loss isn’t quite as big of a hit for your company.
Final Thoughts
Obsolete inventory is a part of running an ecommerce business, but that doesn’t mean there aren’t ways you can manage and reduce the loss to your business.
This article introduces 10 strategies for managing and reducing obsolescence, including the use of inventory management software. Make sure your company is using a tool that makes processes like identifying dead stock as easy as possible.
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Obsolete Inventory FAQs
As usual, questions don’t stop with the end of a post. Before you move on to another of our lovely blog posts, here are some answers to what may be questions you still have.
What is the difference between obsolete inventory and excess inventory?
Excess inventory is a sign that your inventory may be moving to obsolete, as it hasn’t done much or any movement through the supply chain for the better part of a year.
If you have excess inventory, consider marking it down or bundling it with other products so you can still sell it.
You don’t want the inventory to become obsolete—which is inventory which cannot or will not sell any longer.
How do you write off obsolete inventory on financial statements?
Obsolete inventory is written off on your financial statements.
This can be done in one of two ways. First, you can expense it directly to the cost of goods sold (COGS) account. Or, you can credit the inventory asset account.
How do you get rid of obsolete inventory?
Once you’ve written off your obsolete inventory, you can choose to donate it, sell it to a liquidation company at a loss, or send it back to the original supplier.
Can obsolete inventory be sold?
Obsolete inventory has typically become obsolete because it can no longer be sold.
However, you may be able to still sell some obsolete inventory (as long as it is not expired) by marking it down, bundling it with other products, or selling to a liquidator.
