How to avoid obsolete inventory?
Many companies are not even aware of thousands or millions of dollars that they are losing because of inadequate obsolescence management. What is an obsolete inventory? Per Investopedia definition: Obsolete inventory is a term that refers to inventory that is at the end of its product life cycle. This inventory has not been sold or used for a long period of time and is not expected to be sold in the future. This type of inventory has to be written-down or written-off and can cause large losses for a company (source).
We can identify three main processes that could help us to avoid obsolete inventory or if mismanaged could lead to it.
Configuration management – the way how we control the structure and life of our products from an engineering perspective. And this engineering item is the biggest trap as often it's treated as a purely technical process with ignorance to its impact to supply chain and stock management. As configuration management reflects later in a bill of material changes or existence of product at all its triggering as well when we are starting or stopping order of the material. If changes are implemented (usually via ERP system) too late whole supply chain system is not able to react fast enough to stop the flow of materials that will be never used.
Demand management – it's about how we are controlling and steering demand systems into our ERP system. If we are reacting too late or not at all or adding too many manual buffers into master data then it could lead as well to a situation then the wrong signal will trigger orders for materials that we will never use or burndown will take years.
Replenishment strategies- how we are creating and triggering order signals to our suppliers or production. By defining batch sizes coverage horizons, expected lead times, and buffers (i.e. safety stocks) we could as well pull stock that will become obsolete if we will order too much comparing to real needs.
Proper management over these three areas is key to keep our obsolete inventory under control.
At pawelbirecki.com I can support your organization in the assessment if your processes (in matter how these are designed and executed) protect you from the threat of enormous costs or you should take immediate actions to reduce the risks.
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