Obsolete Inventory
 Obsolete inventory is merchandise that does not have any true or anticipated
demand. Carrying the cost of dead items causes a drag on all of your financial
ratios. Every store needs to create a plan to recapture cash from dead inventory, to
reinvest in inventory that turns. In recent years, the lifecycle of products has
diminished. Today’s hot item is tomorrow’s dead item.
 Liquidating non-performing assets can be time-intensive and emotional. Many
retailers do not have a dedicated system in place for this, and may view it as a low
priority. Some of the reasons for identifying and liquidating obsolete inventory:
o Having a documented process for assessing the value and merchantability
of slow-moving inventory assures that these items are kept to a minimum.
o Liquidating obsolete, non-performing inventory for the best price you can
get is crucial. Every dollar obtained for a non-performing asset is a dollar
of working capital preserved.
o By liquidating obsolete inventory, your store looks fully stocked with
clean, in-demand items. Customer visits are enhanced when they can
count on finding interesting, updated product assortments.
o Merchandise sitting on a shelf costs money. It is not unusual for a retailer
whose inventory has not been reviewed over a period of time to find that
20 – 25% of the store’s total items are non-performers. Even a store that
vigorously culls its inventory could have 5 – 10% of total inventory in
non-performing merchandise. There are a number of reasons for this,
many of which are almost unavoidable.
 There are three components of the costs of carrying dead inventory and its impact
on your bottom line:
o Lost Gross Profit Dollars
Using a very aggressive approach and disposing of your dead inventory,
even at any price, will generate useful cash and clear up space.
o Real Estate Costs
The high occupancy costs of retailing require that every available inch of
merchandising space produce a return on investment. For example, if a
store with 10,000 square feet of sales space has 23% of that space
occupied by non-performing merchandise, and a base rent of $12 per
square foot, that store spends $27,600 per year on space for merchandise
that is collecting dust. If a store with 10,000 square feet of sales space has
just 5% of that space occupied by non-performing merchandise, at $12 per
square foot this is still $6,000 per year with no return.
o Other Carrying Costs
Inventory is a nonproductive asset – it earns no interest but costs you
space, shrinkage, insurance and handling.