Excess or obsolete inventory is a common problem for distribution businesses that can run costs of up to 25% per year. Regardless of the industry or sector, most businesses will have to deal with obsolete inventory at one point or another.
The amount of inventory a business holds affects almost every aspect of its operation. Obsolete inventory also affects the valuation of the business as banks carefully examine inventory when considering working capital lending. The way that inventory is disposed of can also have an impact on the business in different ways. To assist you in managing your excess inventory effectively, here are our recommended five steps to dispose of obsolete inventory.
Use The Inventory As It Is
If you have inventory produced for a particular customer/business that is no longer interested in using it, then it’s possible you can use it the way it is for a similar client. You may have to contact the initial customer to explore settlement options. Once you have another customer interested in the inventory, then you can pass it on as it is.
Modify The Merchandise
There are ways to modify or rework inventory that is classified as obsolete to make it saleable again. If the quality of the product has not been compromised, you can work with your principal supplier or other partners to reconfigure the product to the latest version and correct price. However, you need to ensure that the cost of modification will not make the venture unprofitable.
Sell At a Discount
Sometimes, you may have to slash your prices to get rid of inventory that is on the verge of being classified as excess or obsolete. You can offer inventory that is not selling fast at a discount price to avoid complete loss, even if the quality is intact. For inventory that is already classified as obsolete, recouping 25% of the original value in cash will at least provide you with some return.
Use Valuable Components
If you are dealing with assembled products, you can disassemble, reuse, or sell the valuable parts as spares or essential parts for other products. You can take apart most assembled or sub-assembled products and salvage as much value from it as possible. The value of the parts may only be fractions of the product’s original cost, but as with the previous point, it still provides some level of return.
Donate The Inventory
Donating your excess inventory is another way to get rid of it without incurring an excessive loss, while also ensuring it is put to proper use. There are many charity and not-for-profit organisations that will gladly accept your excess or obsolete inventory. This will help you avoid the cost of scrapping the inventory. In addition to doing a good deed, you will receive a tax credit for your donation.
Minimise Excess And Obsolete Inventory
The best way to handle obsolete inventory is to avoid amassing it in the first place. If this accumulation of obsolete inventory write-offs is a common occurrence, you may consider assigning the disposition and prevention responsibility to a specific team.