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The Two Worst-Case Scenarios of Inventory Obsolescence

Posted by Dylan Jones

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6/25/15 10:08 AM

The problem of obsolescence is one frequently encountered when dealing with surplus inventory, which will often accumulate into millions of dollars. All asset-intensive organizations, even those with a highly mature inventory management process will face the issue of obsolescence. 

The problem of obsolescence is one frequently encountered when dealing with surplus inventory, which will often accumulate into millions of dollars. All asset-intensive organizations, even those with a highly mature inventory management process will face the issue of obsolescence. At one end of the line there may be an organisation boasting an impressive book value but in reality full of worthless, obsolete inventory (read assets); the other may be an underperforming lemon paying no dividends to shareholders due to massive inventory write offs. The treatment of obsolete materials often causes accounting headaches and often a solution for one organisation may not be right for all.

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How do you identify obsolete inventory

As an inventory controller, is this your job? While the inventory control process can certainly identify what inventory is not moving, thus potentially obsolete, those involved in making stocking recommendations are not necessarily those best placed to determine whether the inventory is actually obsolete.

Can the material be adapted and substituted for another purpose? Is the material an insurance or critical spare? These are some of the myriad of questions to be considered and often those best able to ruminate over the answer are end users - often in Operations and Maintenance departments. It can certainly come down to who has the best argument as to whether something is obsolete or not.

The quandary

Once it has been determined that an asset is obsolete, it should be disposed of. The problem is, most assets (read inventory) are recorded at value and to dispose of will require a write off budget to do so.

No problem! Sell it. We all know that once we have purchased something, we cannot generally sell for more than we have paid. As a general rule, this holds true for obsolete inventory especially where materials are dated or purpose built to suit specific equipment. Depending on internal financial policies we cannot generally recoup the book value of the material.

So begins the difficult process of convincing finance departments to allocate funds to allow for disposal. From a high level this sounds easy; however, a common thread heard is that this funding will be quarantined and soon enough the end of the financial year approaches, budgets have over-run in other areas and the obsolescence budget is redirected to cover operations shortfalls.

Treatment of obsolete assets

In summary, there is no easy answer to this problem and each organization will often have different processes to deal with this. At one extreme, the organization faces answering difficult questions from shareholders and regulators asking why the company is valued so highly when there is such a large pool of obsolete (useless) assets. At the other, the shareholders are asking why there is no dividend, and the answer lies in the fact the company ran at a loss due to writing off large amounts of obsolete assets.

What is the (un)happy medium? There is no one solution fits all as there are just as many stakeholders in just as many organisational structures, all tussling over conflicting needs. However, by implementing a robust, ongoing inventory management program spot fires can be dealt with and obsolete inventory can be identified in a timely manner and disposed of before it becomes a raging inferno.

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Topics: Surplus inventory, obsolete inventory

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