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Obsolete inventory, how do you deal with this in a data-driven way?

Apr 12, 2022

Every webshop and/or wholesaler has to deal with obsolete stock. Apart from filling up warehouse space unnecessarily, it also increases…
Every webshop and/or wholesaler has to deal with obsolete stock. Apart from filling up warehouse space unnecessarily, it also increases inventory costs. Nevertheless, it is important to get started with obsolete stock. If you do not do this, unnecessary capital will be tied up. Shame! Because you can use this capital to invest in things that generate revenue.

Are you dealing with products that remain idle for a long time ? Time to make this work. This article explains what obsolete stock is, how you can get to grips with it and what you can do with it.

The emergence of obsolete inventory

On average, the stock of an e-commerce company is more than 21%. Obsolete stocks are products that can no longer be sold or must be sold at a loss-making price.

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They are also products that have been stored for too long and are the result of wrong estimates by the buyer, wrong warehouse priorities or buying more stock, because this has to be done by the supplier. This causes unnecessary stock build-up, also known as supply that no longer matches the actual customer demand.

As long as obsolete products remain idle in your warehouse, your cost will increase and you will ultimately make a loss. This also affects cash flow and revenue.

Disappointing market expectations

Purchasing is determined by analysing market demand. When a buyer has great confidence in a certain product that will sell well, a large number of units will be purchased. This type of product will be well received once the product is launched. Sometimes, it can happen that a product does not run well. In this case, the demand is smaller than the supply itself.

Wrong warehouse priorities

Stockpiling can also be caused by wrong priorities in warehouse storage. If you work with pallets, you take the space and costs involved into account. If you do not have to take this into account and you have an abundance of warehouse space, you can easily use this. Do you still buy in gut feeling? Then you quickly run the risk of unnecessarily stocking up.

Influence from suppliers

Suppliers can also influence obsolete inventory. For example, a supplier may require that you purchase a minimum number of goods when a product is made to measure. If you want to change a product in colour or shape, conversion costs are involved. This involves resetting a machine to be able to make the desired product. It is then logical for a supplier to set requirements for the minimum purchase. The supplier looks at what a smart quantity is in terms of production in relation to changeover costs. This may not work out so well for your stock, but for the supplier, this is useful in terms of efficiency.

The consequences of obsolete inventory

A tight cash flow ensures that you cannot free up capital for other investments. For example, you cannot spend a budget on marketing campaigns to sell obsolete stock. In addition, you cannot use warehouse space efficiently and this can increase inventory costs.

As products stay for long in the warehouse, their colours can change, dry out or wear out. The quality of the products also decreases and at the same time, the product value decreases. As such, the products can no longer be sold at a profitable price, and that results in a large loss.

Obsolete inventory ultimately results in more loss; you make a loss on products, you have to deal with higher inventory costs and it produces less cash flow.

How do you map obsolete inventory?

You want to avoid obsolete stock as much as possible. You can use a matrix to gain insight into obsolete stock. The matrix below provides insight into a desired and undesired stock situation. This allows you as a shop to determine what your strategy will look like to tackle obsolete stock.

obsolete stock - uk
The matrix consists of four parts: obsolete, current, excess stock and healthy stock.

Obsolete: The two bottom areas from left to right concern the stock that has been idle for too long in the warehouse. They have become unsaleable or must be sold at a loss-making price. You may be dealing with a lot of obsolete goods or little stock that simply remains lying around.

Current: The top two areas from left to right are stock that is selling well. For example, you may have to deal with excess stock that will be sold quickly in the long run and healthy stock. The latter are mainly your A products, which run well and ensure a high turnover.

Overstock: The overstock concerns the top and bottom planes on the left side of the matrix. This category consists of goods that are surplus to requirements, which are difficult to get rid of and goods that you can easily lose in the long run.

Healthy inventory: Every webshop wants healthy stock. In the matrix, these are the top and bottom planes on the right. Healthy stock is a stock that is in balance. You don’t come up short, but you don’t have too much either.

Inventory situations

Obsolete – overstock
The red square is the so-called danger zone. The residual stock is so large that it can hardly be sold anymore. An example of this are Iphone 4 cases. Due to new iPhone models and updates, the iPhone 4 is no longer popular to buy. This also affects the sales of the phone cases.

Obsolete – healthy stock
Unmarketable products with a healthy stock are mainly the C products. The stock is often low and sells less quickly, so that they generate little turnover. For these types of products, it is important to sell them quickly through marketing campaigns. This frees up cash flow for A and B products.

Current – overstock
The products in this square consist of a lot of stock that sells fast. It is a matter of keeping an eye on the stock term. Ultimately, these products will sell on their own and the stock build-up is quickly resolved.

Current – healthy stock
In the ideal situation, the green square at the top right clearly shows what you want in terms of products. This way, there is not too much stock, you have exactly enough and sales are also going well. These are therefore A-products that generate the most turnover.

Three ways to avoid obsolete inventory

Now that you know how to identify obsolete products, it is important to look at how products become obsolete as little as possible.

1. Know the product life cycle

Do you want to prevent obsolete stock? Then it is important as a shop to continue to create a need among customers. This will continue to increase market demand. This can be done by constantly drawing attention to products through marketing campaigns.

Knowing the product life cycle is important here, in order to know the exact actions you can schedule with corresponding budgets. By means of AI and data, you can keep track of where market demands can change in real-time.

Using the right purchasing software, you can keep a grip on this by determining the right stock.

2. Periodically schedule obsolete stock of projects

Obsolete stock is not a favourite topic for many. Nevertheless, it is wise to periodically clear out stock. This allows you to analyse the products that have been idle and whether they can still be sold.

By working with tools that provide insight into A, B and C products, you categorise what your runners and soft runners are. This allows you to quickly know the products that are not sellingwell. With this, you can take steps faster to free up capital that can be spent elsewhere.

3. Use inventory software for data-driven purchasing advice

Monitoring market demand is important to meet customer needs. But how do you do this in a smart and efficient way? By looking closely at trends and seasons, you can largely predict what customer demand will be.

With inventory optimisation software you ensure that real-time data is used strategically for purchasing. You also ensure good supplier management by continuous communication with suppliers and negotiating the desired stock.

Tackle obsolete inventory with real-time data

Obsolete stocks are products that lie idle for a long time because they have become unsaleable. By periodically tackling obsolete stock, you free up cash flow that can be spent on other things.

You can also prevent obsolete stock by data-driven purchasing and using an AI purchasing algorithm. This takes into account trends, seasons and unexpected declines in sales. By purchasing data-driven, you miss out on less turnover by stocking appropriate stock.

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More innovation with Optiply?

Do you want to know how your shop can apply innovative inventory optimisation? Book your demo now. Within 30 minutes you will know how AI and forecasting models play a role in an innovative way by creating more revenue and spending less time on purchasing.

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