How to Account For Obsolete Parts Inventory at Your Automotive Dealership

“We have access to live inventory management, knowing exactly how many units we have in Texas vs. Chicago vs. New York. There’s also the option of remarketing items that are at risk of becoming obsolete. Having access to supply chain data can help you improve supply chain efficiency, including how well inventory is managed. Though inventory forecasting is rarely 100% accurate, it becomes even more challenging when there isn’t enough historical order data or market insights to help make the best decisions. Known as obsolete inventory, holding on to purchased inventory that is no longer sellable can significantly harm your bottom line. For help finding ways to offload obsolete parts and reduce obsolescence, please contact Pro Count West today.

• Dead and obsolete inventory should be a huge financial pain point for material managers; for industrial firms in particular, it costs millions of dollars each year.
• If the result of this equation is a low number, that means that your company more quickly turns inventory to sales.
• If these products are not sold before it reaches the end of its lifecycle, it becomes obsolete.
• Inventory obsolescence is a minor issue as long as management reviews inventory on a regular basis, so that the incremental amount of obsolescence detected is small in any given period.
• NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value.

This way, you have the insights needed to make better decisions on when to repurchase more inventory (or even discontinue an item). Not only can a lack of visibility cause obsolete inventory to go unseen (and therefore increase carrying costs), you also risk stockouts of your high-demand products. Businesses may end up with obsolete inventory when they fail to accurately forecast demand based on historical sales data, market trends, and other factors.

Accurately Forecasting Demand:

Accurate demand forecasting can help businesses avoid overproduction and prevent the accumulation of obsolete inventory. By understanding market trends and predicting consumer demand, businesses can adjust production levels and avoid creating a surplus of unwanted inventory. Inventory obsolescence reserve is a crucial accounting concept for businesses that deal with physical goods.

What’s more, until a brand unloads the obsolete inventory, the brand might still be incurring storage costs. The longer a company holds on to obsolete stock, the higher the lost cost will be. You can also identify obsolete inventory by the stock you have on hand and usage patterns. You can calculate months on hand by dividing monthly usage from the amount of stock. This equates to the ratio of the average number of months inventory stays in stockrooms or warehouses.

Track Inventory Levels in Real Time

Overstocking is a problem because it often creates obsolete inventory that companies cannot sell at full value or cannot sell at all. Businesses must come up with their own parameters for when different types of inventory become obsolete, and this will vary between industries—think about food vs. furniture, for example—and product categories. Start with industry-specific standards to build guidelines for when inventory items should be categorized as slow-moving, excess and obsolete. Because obsolete inventory can lead to major cash flow problems, it can hurt a business’ ability to weather a rough patch. If a company with slim margins consistently finds itself with obsolete inventory and doesn’t address the problem, it could end up in a deep hole.

Additionally, obsolete inventory is often ignored for far too long even as it takes up valuable space in the warehouse. Instead of using this costly real estate to store profitable and fast-moving products, https://www.vizaca.com/bookkeeping-for-startups-financial-planning-to-push-your-business/ old stock collects dust and continues to depreciate. Obsolete inventory, also called “excess” or “dead” inventory, is stock a business doesn’t believe it can use or sell due to a lack of demand.

Ways to Get Rid of Obsolete Inventory

You must know what the inventory turnover is for every single product by dividing the value of the stock by the sales, multiplied by the period (indicated in a number of days in column H). If they walk into a store filled with too many different products, they might walk right back out. It is a delicate balance between having enough stock to satisfy customers and not having too much of it. Manufacturing companies understand this all too well, as they must keep track of the inventory in their warehouses. Census Bureau, the inventory/sales ratio at the end of June 2021 was 1.25, meaning that for every $1 in sales, the company has $1.25 of inventory.

Innovative companies can cause internal obsolescence by improving and replacing existing products. This can render a product obsolete as newer products offer more features or better performance at a lower cost. The world is always changing, and other companies are coming out with newer, better versions of the same product. Your products will eventually become obsolete and no longer have a consumer base. Below, we’ll look at an obsolete inventory definition, the causes of obsolete inventory, and strategies for managing it.