One of many issues that businesses face today is high quantities of obsolete inventory. It is costing your company valuable space and money to keep unnecessary or excess inventory on hand. Even with basic min/max systems in place, over time you end up with slow and dead inventory.
In order to solve this problem, it’s important to understand the two different ways inventory becomes obsolete.
Obsolete Over Time
An item becomes obsolete over time when it is used less frequently or is superseded with a new item that is better, faster or cheaper. For example, let’s say your company bought 100 items of Item A earlier in the year, but by the middle of the year Item B is released and supersedes A. Once Item B is put into your stock, you have duplicate inventory, where one item is superior to the previous revision of that item. Since Item B is the latest and greatest model, the 50 items of Item A become slow and eventually classifies as dead inventory as time goes on. Items sitting on the shelf is a waste of money. Faster moving inventory could be stored in that space and the money used to buy the dead or slow inventory could have been better spent on more productive things.
Dead on Arrival
A majority of dead or obsolete inventory is actually dead on arrival. Imagine you use a basic min/max system, you set the minimum to 10 pieces and the maximum to 20 pieces years ago, but the rate of consumption of this part has dropped over time. If you have 20 on hand and use 1 per month, that equates to 20 months of supply. At some point in time, you finally reach the minimum of 10 pieces, so your system reorders another 10-month supply of items. By using a basic min/max, your system doesn’t recognize the changes in consumption and ends up costing you more in the long run. Most companies that use a min/max system review their reorder points once a year. This causes a huge amount of waste in the system.
Since basic min/max systems can’t re-evaluate your inventory, a new system was created in its place called demand-based ordering. Demand-based ordering constantly re-evaluates your inventory expressed in days of supply and measured against your real time usage. This includes factors like lead time, expiration dates, and a wide-range of other data industrial vending machines can collect. A demand-based ordering system typically reduces inventory levels by 25-30 percent with no change in service levels to the user base. Further, it stops the dead on arrivals from ever reaching your facility.