Inventory Aging

Updated on April 5, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Inventory Aging Meaning

Inventory Aging refers to the phenomenon of goods and products piling up in stock because of low demand, leading to negligible or no sales for an extended period. Such items can be raw materials or finished goods and are problematic, especially to retail brands and store owners.

Inventory Aging

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It is the extension of slow-moving inventory. Some may confuse both as the same, but the former describes stocks that barely move or sell. It can last a week, a month, or even up to ninety days from the supplier’s delivery date. After six months in storage, products are deemed dead stock by the company.

Key Takeaways

  • Inventory aging occurs when particular goods or products accumulate at a facility or retail store with no demand and no sales.
  • It is an extension to slow-moving inventory, but after an extended period, the companies declare such items as dead stock.
  • It leads to unnecessary carrying costs, storage space, loss of capital invested, and poor inventory and stock control.
  • Manufacturers and retailers tend to avoid such items and constantly come up with new ideas to reduce aging inventory.

Inventory Aging Explained

Inventory aging or aging inventory refers to items with negligible or low demand that pile up in the manufacturing unit or retail stores, unnecessarily occupying an ample space and generating costs without sales or profit. Every business has a certain level of aging inventory, especially in retail stores selling multiple products. Warehouses and retailers are constantly endeavoring to reduce such items to maximize profit and properly use space.

Inventory aging analysis helps retailers understand how to stock up on items and better control inventory management wisely. The inventory aging period differs from weeks to months for different industries and sectors. Still, after six months of no sale or movement, the retailer typically considers items as dead stock. A firm or retail owner can learn from their aging inventory and make better business decisions regarding stock management in the future.

It can be because the stock was kept for a particular season, and fewer sales resulted in it being left out after the season. It also occurs because of market inflation, which causes people to avoid making purchases or find a new alternative product. Many KPIs and essential supply chain metrics are derived from aging inventory to plan a better stock management structure.

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Formula

Let us understand the formula for the topic.

Inventory Age Formula (in days)

Inventory Age (days) = Current Date – Date Added

This formula calculates the number of days an item has been in inventory by subtracting the date it was added from the current date.

Average Inventory Age Formula

Average Inventory Age = (Average Inventory Value / Cost of Goods Sold (COGS)) x 365

This formula determines the average age of the entire inventory. It divides the average inventory value by the cost of goods sold (COGS) and then multiplies the result by 365 to express the average age in days.

Examples

Let us understand the concept with the help of real-world and hypothetical scenarios.

Example #1

Suppose Henry runs a clothing store anticipating high sales of sweatshirts in the winter season. He ordered 900 sweatshirts in November, but due to changes in consumer behavior, new fashion trends, and stormy weather forecasts, there were absolutely no sales of them. Henry waited until 31st March 2023. Now, to calculate the inventory age, if the sweatshirt stock was added on 1st November 2022 and the current date is 31st March 2023, the following steps are followed:

Inventory age formula = current date – date added.

= 31st March 2023 – 1st November 2023

=152 days

So, the inventory age is 152 days, which is close to five months, and after six months, Henry probably started considering it as dead stock.

But to understand the average inventory age, suppose out of 900 sweatshirts, Henry was able to sell only 180 sweatshirts and assuming that the average inventory value was $45000 and the COGS was $90000

Average Inventory Age = (Average Inventory Value / Cost of Goods Sold (COGS)) x 365

= (45000/90000) x 365 = 0.5 x 365

= 182.5 days

Higher average inventory age is directly proportional to the longer it will take to sell a product, which in turn induces higher holding costs. On the other hand, a lower average inventory age describes high demand and more reordering to avoid stockout.

Example #2

In the automotive industry, Ford’s initiative, offering up to a $1,000 Aged Inventory discount on slower selling 2023 models, vividly illustrates the challenges and strategies associated with inventory aging. The discounts target specific models, such as the Edge, Explorer, and F-150, that have been lingering on dealer lots for over 60 days. This move is a response to the risks posed by aging inventory, including blockage of storage space, increased carrying costs, and potential loss of capital. By providing financial incentives, Ford aims to mitigate these risks and expedite the sale of these models, preventing them from becoming dead stock.

How To Reduce?

The ways to reduce inventory aging include the following:

  • Retail or warehouse owners often introduce discounts or sales to get rid of aging inventory. Although selling at a reduced price involves a loss, it is still better than having piled-up stock that does not move.
  • With digitalization, goods can be sold on various e-commerce websites to reach a wider audience who may need the product.
  • Bundling up the goods is again one of the best ways to reduce aging; when two or more goods are coupled together, or a dead stock is offered complimentary with another product at a slightly regulated price, it helps in moving the aging inventory.
  • For most businesses, it is convenient to make B2B sales and sell their dead stock to other companies that actually need such goods; this can mostly happen with raw materials.
  • Recycling the materials and dead stock items also helps get rid of aging inventory; moreover, it helps put the stock to some use rather than just occupying space.
  • Firms can opt to donate their aging inventory or make charitable contributions. Business owners who choose this route must have the mindset that although charity won’t bring them any profit, the stock is useless and is clearly taking up storage and other carrying costs.

Importance

The importance of inventory aging is –

  • It helps identify the different types of stock and categorize them accordingly.
  • The determination of inventory aging denotes how long the goods stay in inventory and compares performance with other industry benchmarks.
  • Many KPIs are associated with aging inventory, which offers valuable insights for monitoring and controlling the inventory management process effectively.
  • When a retail store or facility encounters aging inventory, it indicates flaws. It regulates prices and supply management to reduce losses and unnecessary expenses linked to inventory.
  • It brings focus to slow-moving inventory, which is imperative in case it blocks other investments, storage, and opportunity costs.

Frequently Asked Questions (FAQs)

1. What are the risks of inventory aging?

The risks of inventory aging are –
– Blockage of storage space and facility.
– Loans against the aging inventory with no proper sales or profit.
– Carry costs and poor control.
– Firms can incur losses over dead stock, including using the opportunity cost.

2. What is the KPI for inventory aging?

The KPIs for inventory aging encompass the turnover ratio, reflecting the speed of inventory turnover; carrying costs, which include all expenses related to inventory handling, movement, and management; inventory aging percentage, revealing the distribution across different age categories; and slow-moving inventory percentage, indicating the proportion of inventory with a slower pace of movement.

3. What is SAP inventory Aging report?

The SAP Inventory Aging report is a tool that provides a comprehensive overview of the age of items in a company’s inventory. This report categorizes inventory based on the time items have spent in stock, offering insights into the aging process. It aids businesses in identifying slow-moving products, optimizing stock levels, and making informed decisions for effective inventory management.

This article has been a guide to Inventory Aging and its meaning. Here, we explain it with its formula, how to reduce it, examples, and importance. You may also find some useful articles here –

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