Obsolete materials are those which are not useful to the company for various reasons such as, changes in the design or model, changes in the production processes, or changes in the production line etc., or it may be due to change in the use of materials.
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These materials have economic worth or value for which the need no longer exists. These materials, which are not useful for current needs or anticipated production requirements or are usable elsewhere in the organisation, find a place in the stores making demands on valuable storage space and adds to costs.
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Sometimes, because of the high value of the materials, managers are unwilling to authorise their disposition. But their disposition is necessary when it is an established fact that their holding cost is a real loss to the concern.
If for example, it is accepted as a principle that the material would be disposed off if their holding cost for two years is equal to or more than the scrap value, then the materials department will have to spur action.
Frequent reports should be prepared and forwarded with recommendations for disposal to those managers who can authorise such disposals. A follow up procedure should also be established so that materials department can negotiate and expedite disposals and removal of the materials from stocks, either by selling, junking or otherwise.
Because this entails disposal of assets of the company, management must approve of disposal within the guidelines framed for such purpose and corporate policy.
Reasons for Obsolescence:
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In order to minimise obsolescence, the reasons for obsolescence usually encountered in many organisations should be analyzed. One of the most common reasons for obsolescence in many organisation are the sudden development of high technique technology/automation/ raationalization/design change/product change/diversification.
Adoption of standardization and elimination of non-standard varieties has led to obsolescence in a few cases. Changes in the product design invariably leads to same item getting invalid and the entire previous stock becomes obsolete.
When a machine breaks down occurs, sometime it is rectified using parts or assemblies of an identical machine and this process is known as cannibalization. The process if countinued uncheaked, results in obsolete/scrap items.
Faulty forecasts and planning by the marketing department leads to accumulation of obsolete items. Incorrect purchasing practices, buying in bulk, faulty store keeping methods, inadequate stores preservation, inefficient material handling, poor manufacturing method, improper codification, etc., are other causes leading to obsolescence.
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The problem of obsolescence is more acute in spares intensive industries, like power generation, process industries, mining and transport sector. Strategies for identification, minimization and disposal of obsolete items need a good computerized information system for generating periodic reports for action.