Many of us are "pack rats," meaning we have difficulty throwing things away, even when we know we'll probably never use them. Unfortunately, companies that do this may be wasting a great deal of money, because there are very real costs associated with carrying inventory. The more inventory a company carries, the higher these ongoing costs will be, which is reason enough not to carry outdated, or obsolete, inventory.
Let's look at some of the costs associated with carrying all types of inventory.
Labor costs of inventory activities— Time must be spent performing all of the activities required to stock parts, including putting stock away, picking, counting and relocating. The larger the inventory, the greater the number of transactions and the greater the number of people involved. There is also "support" labor required for all of the clerical tasks associated with managing inventory transactions. This labor spent on obsolete inventory is wasted.
Equipment expenses—Equipment is required to load and unload stock as well as transport materials to their points of use. Typically, fork trucks, pallet trucks, tow motors and ladders are used for this purpose. In addition, you need racks and shelves for storage and possibly even pallets and skids for larger parts. Although you may not be transporting obsolete inventory very often, it is not uncommon to periodically relocate slow moving items.
Equipment maintenance—Material handling equipment, especially motorized vehicles, must be maintained. Whether maintenance is performed by internal resources or outside contractors, there are costs involved. In addition, racks, shelves, pallets and skids eventually get worn or damaged and need to be replaced.
Training costs—Many insurance companies require training for operators of motorized vehicles. Although the training may be inexpensive, or in some cases free, employees taking time away from the job are a real cost to any company.
Insurance Premiums—There are always hazards associated with warehousing operations. Typically, insurance premiums escalate in proportion to the size of the inventory being maintained. This means that obsolete inventory can lead to a higher insurance premium.
Opportunity costs—All space used for storage is space that cannot be used for other purposes, such as a new product line, new machinery, expanded office space and more. Lack of available space for these purposes may cause a company to expand or relocate its facility unnecessarily.
The costs shown above are ample reason to get rid of obsolete inventory. There are many ways to address this, but the key is to develop some type of inventory obsolescence program, then stick to it. A suggested format for such a program follows. Even though it is a conservative approach, it will foster a discipline in addressing your obsolete inventory.
Review transaction history of all parts in inventory and initiate these steps:
- If there is no usage in 18 months, the part is not a newly released item, and there are no current open orders for the part, then discard 50 percent of the inventory on-hand.
- Once the inventory is discarded, if there is no further usage in 6 months and there are no current open orders for the part, then discard 50 percent of balance of the inventory on-hand.
- Once the second round of inventory reduction is completed, if there is no further usage in 6 months, then discard the balance of stock.
For small levels of usage during the review period, the company has the choice of either returning to the beginning of the process or continuing to the next step. Large levels of usage during the review period will exclude the item from the inventory reduction for at least 18 months.
You can certainly establish an inventory obsolescence program to suit the needs of your specific company. In some industries, such as electronics, the program described above may be too conservative as electronic components typically have a short useful life, being frequently replaced by more advanced components. A foundry may feel the above obsolescence program is too liberal, believing that the time and effort invested in casting parts warrants keeping them in inventory for a longer period before considering them obsolete.
Whatever obsolescence program you adopt, it is certainly better than keeping things you will not need "just in case."