As I looked at our warehouse, I felt overwhelmed at the number of items we have in stock, and began to wonder how long these products have just been sitting here. This made me contemplate, “Does it really matter that we have so much stock? We’re going to sell it one day, and if an order is placed, then at least we know we have it in stock and ready to ship.” The question that I should be asking is: “Does it really matter that we have so much inventory obsolescence?” The answer to that issue is yes. There are large costs that are incurred by carrying inventory that will become or has already become obsolete.
Inventory obsolescence happens when inventory is no longer salable; this tends to happen when we have too much inventory on hand, when products are out of season, or when demand is decreasing.
Warehouse and Supply Chain Managers need to be aware of the costs associated with inventory obsolescence so that they can properly manage their departments and budget accordingly. I’ve put together a basic list of costs associated with stocking unsalable inventory.
Below are some of the costs that are associated with stocking inventory that is no longer salable:
Labor Costs- Labor spent on obsolete inventory is wasted labor. Employees have to spend time stocking products, picking, relocating, and taking inventory. The more inventory on hand, the more time is spent on performing these activities, thus the higher the costs.
Equipment Expenses- When inventory begins to grow, the need for racks, shelves, pallets, and maybe even a larger warehouse also grows. Not only are these costs fairly high, but these tools can also become damaged and worn. When this happens these tools will need to be replaced. Equipment expenses are ongoing operating costs.
Opportunity Costs- This affects us more than the others. When obsolete items are stored, the opportunity to stock more of the products that are in a higher demand is out of the question. Not only are customers not provided with the newest trends or “in” products, but the sales that could be acquired are essentially lost.
There are other types of costs that should be taken into consideration. Charles Atkinson’s article on When to Get Rid of Stock explains that when a company realizes that it is not profitable to keep such inventory, their best choice is to get rid of the stock they do have. Whatever the outcome maybe, the key is to develop some type of inventory obsolescence program that will save the company money in the long run.