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Obsolete inventory is a term that is used to describe products that are at the end of a period in which they are salable or have, in some other way, expired. This kind of inventory is also sometimes referred to as "excess inventory" or "dead inventory." For example, calendars printed for the year 2010 become obsolete inventory at the end of December of that year. However, the calendars may be seen as obsolete as early as the month of February or even late January as most people purchase their annual calendars by the end of the closing year or quite close to the beginning of the new year. By the very end of the year for which the calendars are intended, however, they are completely obsolete.
Companies strive to avoid obsolete inventory with sales projections. In most markets there are naturally going to be some overages, but the hope is that these overages are small and can be compensated for by the price of the bulk of the product that does sell. Another way to avoid obsolete inventory is to plan for sales so that the inventory moves more quickly at a discounted rate before it becomes completely obsolete.
The rate at which inventory becomes obsolete is usually defined by the industry. For example, the fashion industry operates on a seasonal basis. At the end of one season, new apparel comes in and the apparel from the previous season is sold at a discount. By the time clothing is three or four seasons old, it is usually considered to be obsolete. In some cases, these shoes, garments, and accessories will be sold through alternative sources such as discount clothing chains.
Large amounts of obsolete inventory can spell huge losses for a company, which is why executives spend so much time trying to make sure that the correct amount of inventory is purchased or produced. Furthermore, reports of large amounts of obsolete inventory often serve as warning signs for investors and can, therefore, threaten the stability of a company. A large amount of obsolete inventory may be a warning sign of a poor inventory process, incorrect demand forecasts, and also weaknesses in the product. If a product, for example, receives very poor reviews and is reported on in a negative manner by consumers, then there may be a large amount of obsolete inventory. This kind of problem is often the result of a poor quality product.
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