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The Silent Profit Killer: How to avoid Obsolete Stock in your business

Updated: Jun 11

Did you know that 80% of companies destroy value through outdated inventory? That's right, holding onto obsolete stock can be a major drain on your cash flow and overall profitability.



Think of it like food in your fridge. Would you keep something past its prime, taking up space and potentially spoiling other items? Of course not! Yet, many businesses fall victim to the same trap with their inventory.

Here's why obsolete stock is a problem and how you can be the exception:


The Dangers of Lingering Inventory:

  • Hidden Costs: Obsolete stock takes up valuable storage space, creates extra handling, and can even expire or become unusable.

  • Masking Problems: Provisions for obsolete stock can create a dangerous blind spot. These accounting entries mask the true cost of outdated inventory, making it seem like a one-time financial hit. The problem is, companies lose the crucial information about why the stock became obsolete in the first place. Without understanding the root cause, they risk repeating the same mistake, leading to a cycle of wasted resources and lost profits.

  • It gets unnoticed: Without a clear definition of obsolete stock and proper measurement methods (like cycle counting), the problem goes unnoticed.

  • Hidden Treasure for Savvy Buyers: During a company sale, obsolete stock can become a hidden windfall for a professional buyer. Sellers, lulled by provisions, may overlook the true value tied up in outdated inventory. However, a shrewd buyer with strong inventory management practices will spot this hidden cash flow potential. By effectively dealing with the obsolete stock, they can unlock additional value that the seller simply didn't see.


Taking Control of Your Inventory: zero tolerance!

  1. Accurate Inventory Management: Ensure regular stock takes with procedures like "list to floor, floor to list" to guarantee everything is counted. Spot check all stock is counted for!

  2. Identify Obsolete Stock: Create an aging report (manually if necessary) to categorize your inventory and set goals and SMART actions for reduction per item.

  3. Form an Obsolete Stock Task Force: This dedicated team will regularly assess obsolete items and implement solutions like sales promotions, scrapping, or internal transfers.

  4. Address the Root Cause: Analyze why stock becomes obsolete – you might uncover issues like sky-high minimum order quantities, haphazard ordering practices, or even an unwillingness to hold customers to contracts. And then there's the plot twist of unexpected quality problems in production. That's what makes tackling obsolete stock so fascinating – it's a chance to solve the case and unlock hidden profits for your business!

  5. Shine a Light on the Issue: Keep senior management informed about obsolete stock levels to ensure it remains a priority. Instead of viewing obsolete stock management as a one-time project, make it a part of your everyday management control.

  6. Act Now: Don't wait! Tackling obsolete stock early unlocks hidden value faster. Remember, resolving these issues can take time – often 6 to 12 months. The sooner you begin, the sooner you'll free up trapped cash flow and boost your bottom line.


Is obsolete stock silently draining your profits? 

Don't wait until it's too late! The EquityBuilder program offers a comprehensive approach to obsolete inventory reduction. Let's chat and see how much value we can uncover together.

 

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