Learn how to avoid or reduce inventory obsolescence with these five inventory management skills. Improve your inventory valuation and accounting.

Close coordination is required between marketing/ sales and supply chain/ inventory team. Before launching a product marketing should inform the inventory team about the new products in the pipeline in due time so that further ordering of raw materials is stopped and production is also stopped. Simultaneously it is also important for supply chain team to explain their constraints to marketing to improve synchronization. Without coordination, obsolete inventory is bound to accumulate which will have to be sold at a discount and will also hit the company's bottom line due to inventory holding costs.

How can inventory obsolescence be prevented?

Inventory obsolescence is the loss of value or usefulness of inventory items due to changes in demand, technology, quality, or market conditions. It can result in wasted resources, lower profits, and higher taxes for businesses that deal with inventory. Therefore, preventing inventory obsolescence is a key skill for inventory management. In this article, you will learn some practical strategies to avoid or minimize inventory obsolescence and improve your inventory valuation and accounting.

1 Understand your inventory cycle

The first step to prevent inventory obsolescence is to understand your inventory cycle, which is the time it takes for inventory items to move from purchase to sale. By tracking and analyzing your inventory cycle, you can identify the optimal level and turnover rate of inventory for your business. You can also forecast the demand and supply of your inventory items and adjust your purchasing and pricing decisions accordingly. This will help you avoid overstocking or understocking inventory items that may become obsolete or lose value over time.

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2 Implement inventory control methods

The second step to prevent inventory obsolescence is to implement inventory control methods, which are the techniques and procedures used to monitor and manage inventory items. Two of the most common methods are FIFO (first-in, first-out) and LIFO (last-in, first-out). FIFO reduces the risk of obsolescence and spoilage, as well as improving the accuracy of financial reporting. LIFO may be beneficial for businesses dealing with high inflation or rapidly changing technology, as it lowers taxable income by increasing cost of goods sold. Additionally, ABC analysis is another option that categorizes inventory items into three groups based on their value, demand, and usage. By applying different levels of control and attention to each group, you can optimize your inventory management and reduce obsolescence costs.

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3 Use inventory management software

The third step to prevent inventory obsolescence is to use inventory management software , which is a tool that automates and simplifies the tasks and processes related to inventory management. This software can help you track and update your inventory levels, locations, and movements in real time, as well as generate and analyze reports and metrics. You can also set alerts and notifications for any inventory issues, such as low stock or expired items. Additionally, it can integrate with other systems and platforms, such as accounting or e-commerce, and help you implement inventory optimization techniques like demand forecasting or replenishment planning.

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Contadora.Nataly Arias Zambrano

Contadora PÃºblica de la Universidad de la Salle, Especialista en Normas Internacionales de Contabilidad y AuditorÃa de la Universidad Jorge Tadeo Lozano, certificaciÃ³n en PresentaciÃ³n de Inf Financiera Internacional ACCA
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Cuando se cuenta con un software contable es indispensable que las personas encargadas de ingresar y actualizar la informaciÃ³n tengan pleno conocimiento de cuales son los datos claves que deben cargar en el sistema asociados con fechas de vencimiento y lotes de producciÃ³n, dado que esta informaciÃ³n sera clave en el momento de analizar los productos del inventario.

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4 Review and update your inventory policies

The fourth step to prevent inventory obsolescence is to review and update your inventory policies, which are the rules and guidelines that govern your inventory management practices. These policies can help you define objectives, establish standards, determine procedures, and assign responsibilities. By reviewing and updating your inventory policies on a regular basis, you can ensure that they are in line with your business goals and market conditions. Furthermore, this can help you identify and address any gaps or weaknesses in your inventory management system, thus preventing inventory obsolescence.

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Contadora.Nataly Arias Zambrano

Contadora PÃºblica de la Universidad de la Salle, Especialista en Normas Internacionales de Contabilidad y AuditorÃa de la Universidad Jorge Tadeo Lozano, certificaciÃ³n en PresentaciÃ³n de Inf Financiera Internacional ACCA
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Dentro de las polÃticas de administraciÃ³n del inventario se deben considerar los pasos para el calculo del Valor Neto Realizable, el cual es un indicador clave para determinar si el inventario esta generando perdidas de valor que se puedan asociar tambiÃ©n a temas de obsolescencia. Al realizar este calculo e identificar este tipo de productos las diferente gerencias de las organizaciones podrÃ¡n tomar decisiones oportunas para evitar la obsolescencia del inventario.

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5 Dispose of obsolete inventory

The fifth step to prevent inventory obsolescence is to dispose of obsolete inventory, which is the inventory that has no value or use for your business. Doing so can help free up space and resources for more valuable and productive items, reduce your inventory carrying costs, and recover some of the lost value or revenue. Additionally, you can avoid or reduce the write-off or write-down of your obsolete inventory items, which can affect your financial statements and tax liabilities. To dispose of obsolete inventory, you can sell or donate them to other businesses, charities, or customers at a discounted or nominal price; return or exchange them to your suppliers or vendors for a refund or credit; recycle or reuse them for other purposes or products; and/or destroy or discard them in a safe and legal manner.

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Contadora.Nataly Arias Zambrano

Contadora PÃºblica de la Universidad de la Salle, Especialista en Normas Internacionales de Contabilidad y AuditorÃa de la Universidad Jorge Tadeo Lozano, certificaciÃ³n en PresentaciÃ³n de Inf Financiera Internacional ACCA
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Este proceso debe estar acompaÃ±ado de toda la evidencia (actas, registros fotogrÃ¡ficos, etc), en donde se deje constancia de cuales son los productos que se deben retirar del inventario, y porque motivo se deben retirar, asÃ mismo esta informaciÃ³n se debe registrar en el software de administraciÃ³n del inventario.

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6 Hereâ€™s what else to consider

This is a space to share examples, stories, or insights that donâ€™t fit into any of the previous sections. What else would you like to add?

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Danish Hasan

Top Inventory Management Voice | Manager Inventory Management and Spare Stores | Inventory Optimization | Supply Chain Management | Supply Chain Analytics | Data Analysis | Power BI
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Close coordination is required between marketing/ sales and supply chain/ inventory team. Before launching a product marketing should inform the inventory team about the new products in the pipeline in due time so that further ordering of raw materials is stopped and production is also stopped. Simultaneously it is also important for supply chain team to explain their constraints to marketing to improve synchronization. Without coordination, obsolete inventory is bound to accumulate which will have to be sold at a discount and will also hit the company's bottom line due to inventory holding costs.

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KUNAL BHAT , PMP

I help Fortune 1000 organization drive digital transformation through SAP S/4HANA, IBP & MM integration | Solution Architect | 40% efficiency gains | PMP
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To prevent inventory obsolescence, businesses should employ proactive strategies such as regular monitoring of product demand, implementing just-in-time inventory systems, and utilizing accurate forecasting tools. Establishing clear communication channels with suppliers helps adjust orders in response to market changes. Implementing discounts or promotions for slow-moving items can stimulate sales and reduce excess stock. Additionally, embracing technological advancements like data analytics aids in identifying trends and optimizing inventory levels. Regularly reviewing and updating product portfolios based on market dynamics ensures a more agile and adaptive approach to inventory management, minimizing the risk of obsolescence.

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How can inventory obsolescence be prevented?

1

2

3

4

5

6

1 Understand your inventory cycle

2 Implement inventory control methods

3 Use inventory management software

4 Review and update your inventory policies

5 Dispose of obsolete inventory

6 Hereâ€™s what else to consider

Inventory Management

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Directory

How can inventory obsolescence be prevented?

1

2

3

4

5

6

1 Understand your inventory cycle

2 Implement inventory control methods

3 Use inventory management software

4 Review and update your inventory policies

5 Dispose of obsolete inventory

6 Hereâ€™s what else to consider

Inventory Management

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