Stock Excess and Obsolescence Policy


Looking for some help please - hopefully this is the right forum for this kind of question - apologies if not.

I work for a car parts business and one of my responsibilities is around the management of inventories and stock provisions. The majority of SKUs, as you'd expect, are car parts: they have a long life cycle, are mainly non-perishable and have a fairly consistent demand pattern. The challenge is in keeping the right levels of stock for the relevant demand whilst improving availability and trying to grow the business.

The existing provision methodology for end of life and excess stock is quite simple and works for the core product range.There are a few exclusions for new products, but the basic principle is: we take the sales volumes over a rolling 12 month period (each month end) and we make a full provision for the qty of stock currently held that is in excess of that 12 month level. 

However, we have a couple of areas of the business where this policy doesn't really work. For instance, we have an equipment arm of the business whose products are technical with a shorter lifespan and therefore phased out and replaced with newer models. One new product might do the same job as a the product it replaced, but it is a distinctly different product reference, therefore has a different sales rate in the existing provision calculation.

We are also developing our retail side of the business, with products being phased in and phased out more regularly, along with products that are sourced from the far east, which may be purchased once in bulk and not repeated.

In both of these cases, we tend to plan for and order a forecast volume and then track the sell through. That might be for a year, or a season, but would tend to be a one-off campaign, which may or may not be repeated depending on the success, or new/different products coming along.

Typically with these kinds of products you have winners which sell through at a strong margin without compromising on price, and you have losers where you don't achieve the sales demand that you forecast for, even if you end up dropping the price to encourage sell through. It may be that you plan to sell 70-80% at a good margin, the next 15-20% at a discount or even at cost, and then there may be some scrapping or heavy discounting involved in clearing the last of the items.

The problem here is that the existing policy doesn't work for these kinds of products. Say we have 100 pieces of equipment in stock costing £1,000 each. Last year we sold 60 units, so the current situation is that we have 60 "active" and 40 "excess" so have a provision of £40,000 on a stock value of £100,000.

Lets say we normally sell these at £1,500 each making 33% margin, but we want to "utilise" the provision to help clear the current stock more quickly by heavily discounting, so we sell at £1,100. As a result the following month end we have sold 20 more units because of the great discount.

Our annual sales volume has now increased to 80 and stock on hand reduced to 80, so the next month end the £40,000 provision will be completely dropped. Despite reducing the trading margin to sub 10% the monthly EBITDA is great because of the disproportionate provision release. In reality we still have 80 units of this "problem" item, but now we don't have any provision to help support the sell through on a discounted basis.

Ideally for these products, once a provision is made then it should remain and only be released in proportion as the stock levels are sold through. I have therefore been asked to propose a refined policy for products that meet certain defined criteria, and which are purchased and behave in this way. 

I would therefore like some help and ideas from people who have worked with similar policies, most likely in retail for medium/short life product and far east sourced product.

many thanks in advance.