Obsolete Inventory Percentage
The obsolete inventory percentage is a metric that measures the portion of a company’s total inventory that is deemed obsolete. It’s calculated by dividing the value of obsolete inventory by the total value of inventory, then multiplying the result by 100 to get a percentage.
Here is the formula:
Obsolete Inventory Percentage = (Value of Obsolete Inventory / Total Value of Inventory) x 100%
This metric can provide useful insights into inventory management and financial health of a company. A high percentage may suggest problems with inventory management, such as overproduction, slow-moving goods, or a failure to adapt to changes in market demand. Conversely, a low percentage suggests the company is effectively managing its inventory and keeping pace with market changes.
It’s important for companies to monitor and manage their obsolete inventory percentage, as excessive obsolete inventory can lead to high carrying costs and a significant write-down of inventory value, which can negatively impact profitability.
Example of the Obsolete Inventory Percentage
Suppose you have a company, TechCo, which sells various types of electronics. The value of your total inventory is $500,000.
You’ve done an inventory review and identified certain items that are obsolete – for example, some outdated models of laptops and smartphones that have been superseded by newer models. The total value of these obsolete items is $50,000.
You would calculate the obsolete inventory percentage as follows:
Obsolete Inventory Percentage = (Value of Obsolete Inventory / Total Value of Inventory) x 100%
= ($50,000 / $500,000) x 100%
= 10%
So, in this case, 10% of your total inventory is considered obsolete.
This percentage can provide valuable insight into how effectively you’re managing your inventory. If the percentage is high, it suggests you might need to improve your inventory management practices to reduce the amount of obsolete inventory. This might involve better forecasting of demand, more frequent review of inventory, or quicker response to changes in the market. On the other hand, a low percentage indicates that you’re doing a good job of keeping your inventory up to date.
