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What is Inventory Disposition? (2024 Update)

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In this article, we will explain exactly what Inventory Disposition is and how to manage it to optimize your inventory and improve profitability. Read on to learn more.

inventory disposition
Source: losspreventionmedia.com

What is Inventory Disposition?

Inventory disposition determines how businesses handle surplus, outdated, or returned items. It involves reintegrating, selling, recycling, donating, or discarding these products.

Example: BlueWave Tech has an excess of outdated computer models and implements inventory disposition by launching a clearance sale, with plans to donate unsold units to local schools.

disposition inventory
Source:forbes.com

Types of Inventory Disposition

Below are some common types of inventory disposition actions:

Sales: Selling inventory to consumers or other businesses. This is the primary disposition method for most items in regular demand.

Discounts or Promotions: Reducing prices to move outdated, overstocked, or slow-moving inventory.

Donations: Some companies donate unsold goods to charities, especially if the cost of storing or disposing of the items exceeds their value.

Recycling: If products or their components can be reused or repurposed, they might be recycled.

Return to Vendor: If inventory is defective or if there was an error in the order, items might be returned to the supplier.

Scrap or Disposal: Some items, especially those that are obsolete or can't be sold, donated, or recycled, might be disposed of or sold for scrap.

Write-offs: In accounting terms, if inventory loses its value (due to theft, damage, obsolescence, etc.), it can be written off, meaning its value is reduced or eliminated from the company's financial statements.

Transfer: Moving inventory from one location to another, which might be done to balance stock levels across different locations or stores.

inventory disposition importance
Source:alamy.com

Why is Inventory Disposition important?

Inventory disposition is crucial for a number of reasons. We have listed the most common below:

Cash Flow Optimization: Efficiently disposing of excess or obsolete inventory frees up cash for reinvestment or operational needs, enhancing liquidity.

Reducing Storage Costs: Proper inventory disposition minimizes expenses related to warehousing, security, insurance, and potential spoilage.

Loss Prevention: Timely disposition prevents financial losses from obsolete or spoiled inventory.

Operational Efficiency: Effective inventory management, including disposition, maintains a streamlined supply chain by preventing overstocking and ensuring easy access to items.

Sustainability: Environmentally-friendly inventory disposal reduces waste and carbon footprint, potentially generating revenue through recycling.

Reputation: Proper disposition, such as donations or eco-friendly methods, positively impacts a company's image, while improper disposal can harm its reputation.

Regulatory Compliance: Compliance with disposal regulations, especially for hazardous materials, avoids legal issues in regulated industries.

Financial Accuracy: Accurate inventory valuation through proper write-offs and adjustments ensures truthful financial reporting, preventing misleading financial statements.

Customer Satisfaction: Disposing of old or slow-moving inventory creates space for high-demand items, improving customer satisfaction and sales.

Risk Management: Effective disposition mitigates risks like theft, fire, or damage, particularly with large stock quantities.

inventory disposition steps
Source:unitwise.com

10 Steps to Managing Inventory Disposition

Effective inventory disposition requires a systematic approach. Here are some steps that businesses can take to ensure they manage and dispose of their inventory efficiently:

1. Inventory Audit and Categorization

Regularly check your actual stock and categorize items based on movement speed, damage, or obsolescence.

2. Analysis and Decision Making

Based on categorization, decide on the best disposition strategy, such as selling, returning, recycling, or donating.

3. Adjust Pricing and Promotions

Implement discounts or bundled offers to move overstocked or nearing end-of-lifecycle items.

4. Engage with Suppliers and Partners

Negotiate returns, exchanges, or collaborations for slow-moving items. Consider liquidators or auction platforms for large excesses.

5. Implement Technology

Adopt inventory management software or ERP systems for tracking, demand forecasting, and providing disposition alerts.

6. Review and Adapt

Continuously monitor market dynamics, consumer preferences, and external factors to adjust disposition strategies as needed.

7. Clear Policies and Documentation

Establish clear disposition policies and maintain records for all disposed items for accountability and potential audits.

8. Promote Sustainability

Prioritize donations, recycling, and environmentally-friendly disposal methods.

9. Ensure Disposal Compliance

Always dispose of items, especially hazardous ones, in accordance with regulations.

10. Collaboration

Engage with internal teams, such as marketing, to develop strategies for clearing excess stock efficiently.

inventory disposition example
Source: 123rf.com

Example

TechGadget Inc. is an electronics company that deals with various electronic devices. In the example below they apply our inventory disposition framework.

1. Inventory Audit and Categorization

‍TechGadget Inc. conducts a quarterly inventory audit and categorizes its products. They identify that the "Gizmo X1000" smartphones and "Electra Tab 3000" tablets are slow-moving items in their inventory.

2. Analysis and Decision Making

‍Based on the categorization, TechGadget decides to implement a disposition strategy for the "Gizmo X1000" smartphones. They will sell them at a discounted price to clear excess stock.

3. Adjust Pricing and Promotions

TechGadget Inc. starts offering the "Gizmo X1000" smartphones at a 30% discount to encourage faster sales and prevent obsolescence.

4. Engage with Suppliers and Partners

TechGadget negotiates with its suppliers to return a batch of defective "Electra Tab 3000" tablets. They also collaborate with a local electronics liquidator to efficiently handle large excesses of various products.

5. Implement Technology

TechGadget adopts an advanced inventory management software that tracks real-time sales data for all products. The software sends alerts when "Gizmo X1000" stock levels reach critical points, enabling timely disposition decisions.

6. Review and Adapt

TechGadget continuously monitors market trends and consumer preferences. As demand for "Electra Tab 3000" tablets declines further, they adjust their disposition strategy by recycling components and donating some tablets to schools.

7. Clear Policies and Documentation

The company establishes clear policies for handling returned and damaged items. They maintain detailed records of all disposed items for auditing purposes.

8. Promote Sustainability

TechGadget Inc. emphasizes sustainability by recycling electronic components from returned and damaged products. They also donate older electronics to local charities and schools.

9. Ensure Disposal Compliance

TechGadget ensures compliance with environmental regulations by responsibly disposing of hazardous materials from damaged electronics.

10. Collaboration

The marketing team collaborates with the sales department to create promotional campaigns for the discounted "Gizmo X1000" smartphones, maximizing their sales potential.

In this example, TechGadget Inc. effectively applies the 10 steps of inventory disposition to manage and optimize their inventory. This will ensure that they minimize losses and maximize the value of their products.

We hope that you now have a better understanding of what Inventory Disposition is and how to effectively manage this to optimize inventory and improve the profitability of your business.

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