As a follow up to Arianna’s blog highlighting the costs associated to inventory obsolescence, I’d like to provide a couple considerations for tackling this costly issue. Arianna addresses the importance of first recognizing this as a problem, especially if all you’re doing is cleaning house, when you can no longer move around in your warehouse; then you’re not managing obsolescence.
Define what you consider obsolete inventory. Here are some examples of what to look for when developing your definition of inventory obsolescence:
- A Product not directly supporting your company’s current and future branding, resulting in consumer demand turning less than “X” times in “Y” period of time. This can be a result of shifted marketing focus and resources, when the company shifts efforts other departments do as well.
- Customer demand turning less than “X” times in “Y” period of time despite focused marketing efforts.
- Seasonal product.
- Product directly or indirectly tied to changing technologies. Today’s must have camera is tomorrow’s hand-me-down.
- Inventory recording errors.
- Abandoned inventory resulting from policy changes.
Now that you have your definition of obsolete inventory, identify inventory that meets your definition of obsolete inventory:
- Perform a complete inventory.
- Identify each line item meeting your definition.
- Identify each line item by criteria met.
- Summarize each criterion’s total number of occurrences and associated product cost.
- Summarize the total number of occurrences and associated product cost to provide a clear scope of cost.
With inventory defined and identified, action steps can now be taken:
- Prioritize based on “occurrences” from a procedural perspective or “product cost” from a liquidation/cash perspective. If resources permit, both can be tackled simultaneously.
- Establish well defined performance metrics to identify and address “ageing” inventory proactively based on procedural perspectives and/or a liquidation/cash perspective rather than when you can no longer move in the warehouse.
- Liquidate obsolete inventory even with a product cost loss.
- Identify processes that end in inventory recording errors like receipts of goods, bin moves, and manual entry errors. Recommendations can then be made for process improvements.
- Review policies like: vendor performance and terms, customer cancellations and returns, and pricing.
Finally, to insure long term success, clearly identify the person/team responsible for your company’s inventory obsolescence management along with establishing an ongoing review process. With time you can expect ongoing process improvements such as improved inventory accuracy, reduced operating expenses, improved cash flow, and improved return on your investment.