Every organisation has some stock which is of no further use. These are the materials” which are no longer demanded and with industrial progress, there is no responsibility of the concern again starting the production of the same product for which these materials were used.
Therefore, investment on such stock cannot be realised or fully realised. However, it occupies space which could be better utilised for storing other items. Materials not likely to be ever consumed in the manufacturing of a finished product are classified as dead inventory. It may consist of various categories of items like obsolete, surplus inventory, deteriorated stock, scrap and waste materials etc.
Reasons for the Accumulation of Obsolete, Surplus & Scrap Items:
Reasons for the accumulation of obsolete, surplus & items can be elaborated as follows :
1. Faulty planning & forecasting
2. Changes in product design
4. Faulty purchase practices
6. Other causes.
1. Faulty Planning & Forecasting:
The marketing department may have projected a sales forecast which might be on the higher side. Any materials’ planning has to be based on sales forecasts and this could result in surplus items. Wrong indenting by the user departments also leads to accumulation.
2. Changes in Product Design:
This may lead to some items getting invalid so far as the final product is concerned. Hence, the entire stock of such items becomes obsolete.
When a machine breakdown occurs, sometimes it is rectified by using parts of an identical machine which is not functioning due to various reasons. This process of cannibalisation is not uncommon in many project-based industries.
4. Faulty Purchase Practices:
Sub-optimising decisions like buying in bulk to take care of discounts and transportation economy without taking into account factors such as shelf life, storage space requirements and technological changes once again lead to the accumulation of surplus and obsolete stocks.
Sometimes raw materials are rationalised so as to minimise variety and simplify proceurement. The rationalisation process renders some items as surplus or obsolete.
6. Other Causes:
Many items are held as insurable spares for many years without any consumption. Faulty store keeping methods, without adequate preservation, lead to spoilage. Inferior materials handling, improper codification and poor manufacturing methods also result in obsolete, surplus and scrap items. Poor maintenance of machine tools may result in excessive tool wear and greater process scrap.