Causes for Obsolete Inventory

It is a common misconception that inventory cannot go to waste, and that mature stock can
always be sold at some point in the future. Obsolete inventory, or dead inventory, is stock that
can no longer be sold because the product has reached the end of its life cycle. Dead inventory
will not receive sales for a long period of time and is not expected to sell in the future. Obsolete
inventory is one of the most costly inventory expenses, and can result in extreme losses for a
business.
The first step to avoiding storing obsolete inventory is to identify the main causes of the
problem:
1. Inaccurate Forecasting
Inaccurate forecasting while initiating purchase request can cause our company to hold excess
stock that might later turn into dead inventory. At the end of a product’s life cycle, the parts or
goods that are hold in excess will not be able to sell. For example, if our company had a surplus
of rotary phones as touch-tone phones became popular, the rotary phones would become obsolete
stock. Inaccurate forecasting can cost your business the warehouse and inventory expenses of
keeping dead stock in storage, as well as the cost of the products and disposing them if they do
not sell. Using effective forecasting techniques will help a business accurately meet its consumer
demand and avoid risks associated with having surplus stock.
2. Poor Product Quality or Design
Poor production quality or design occurs when a product does not meet the expectations of
internal and external customers. When this occurs, product demand will quickly decline, leaving
the company with an enormous amount stock that cannot sell. The cost of a poorly designed or
poor quality product is high, since it will shorten the product’s life cycle and damage the
reputation of the company's brand. Establishing excellent quality assurance practices and
thorough market research will help a company avoid carrying obsolete stock produced by poorly
designed or quality products.
3. Inadequate Inventory Management System
Manually tracking and planning our company’s future orders is error-prone and time-consuming.
Using an inventory management system to track its stock levels will allow our company to
safeguard against inventory surpluses that could turn into obsolete stock. Finding the right
inventory management system can help our business reduce stock surpluses and help us avoid
carrying obsolete stock.
4. Long Lead Times
Long lead times are produced by shortage of foreign currency and inefficiencies in a supply
chain, and can cause our company to accumulate excess inventory. Reducing lead times will help
streamline your supply chain and decrease the amount of stock that we need to keep in storage.
Proactively shortening our lead times will prevent our business from carrying large amounts of
obsolete stock by improving the accuracy of purchase orders to consumer demand. Purchase
order accuracy can be increased because our company will be able to forecast demand closer to
delivery though a just-in-time delivery strategy is very difficult and even unthinkable with the
current situation of our country.
5. Lack of Management of Obsolete Inventory
Expecting dead stock to sell as we accumulate storage expenses is not an effective way to
manage our inventory. Our business needs to put an inventory reduction plan in place that will
mitigate the risk of accumulating obsolete stock. An inventory reduction plan assigns a team of
employees to actively work improving inventory processes that will reduce our levels of obsolete
inventory.