Those are very interesting observations. First, I’d like to mention that “distributing products of inferior quality” is never my intent. The concept of obsolete inventory does not, in my mind, constitute product that should have been scrapped in the first place. To illustrate, there was the case of a Fortune 500 electronics firm back in the eighties whose management team decided to ‘hide’ the fact that some work-in-process inventory had failed the testing process. By the time this management ‘oversight’ came to light, the problem was in the $millions in failures. As a result of this, the company had to sell the entire production facility to recover its losses. Had they written off, or in this case, scrapped the product as it failed, and plugged the leak, the impact would not have been so severe.
When I speak of obsolete inventory, a couple of examples come to mind. One was a vertical blind extrusion factory that sold its blinds to store chains and decorators through a catalog and outside sales representatives. They had removed several items from their catalogs, yet kept the “left-over” cases in their warehouse and on their books at production value. At one point, there was a 10,000 sqft area in their warehouse that held inventory that had no sales effort associated with it.
The client argued that the inventory had value and should remain on the balance sheet, yet that customers would not pay what its (production) value was. In keeping with the inventory value rule that states that inventory should be valued at the lower of the two, cost or market, I recommended that they focus on the market value, and discover what customers might pay for it, say through a half-price sale. This kind of effort increases cash flow for the short term, while reducing the space required to store it.
In another example, I worked with a company that retrofitted passenger vans for wheelchair use. They would remove brand new seats from a new van and replace them with whatever the customer required. There was nothing wrong with these new seats, but the business owner had not felt the need to do anything but store them. In two years, he had built up quite a tore of them and was even pondering renting more space in which to store them.
In this case, their book value was indeed zero, yet this ‘waste product’ from a production process could easily be sold, perhaps to an automobile dealer or body shop, or in the local weekly flea market paper.
In no case would I recommend ‘dumping’ obsolete inventory where it might cannibalize sales of the main product. Does that clear up some of the question?