INVESTOPEDIA.COM defines obsolete inventory as a term that refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set period of time usually determined by the industry.
Obsolete inventory also can be referred to as dead or excessive inventory. Generally Accepted Accounting Principles, also known as GAAP, require dealers to write off obsolete inventory as soon as it’s identified. In general, accounting rules direct dealers to establish a reserve account for obsolete inventory on their balance sheets and expense it as they dispose of it. But this practice reduces profits and can create huge losses.
There are several causes for obsolete inventory. One of the most common is the requirement from OEMs to stock quantities for specific part numbers for each model of vehicle that the dealer has for sale. If the particular bike model doesn’t sell as well as expected, these parts will still be on the shelves long after new models have replaced the slow sellers.
Most dealers accept this as a cost of doing business, but that leaves the problem of what to do with the leftover inventory.
Each OEM has its own parts return policy but will not credit a dealership for all parts not sold. For example, if a dealership purchases $100,000 worth of parts, the OEM may take back 2 percent to 5 percent annually, but only at its current value — not necessarily what was paid when purchased. Also, parts must be in their original packaging.
Obsolete inventory is a reality for any dealership but viewing it as a continuing problem or a business opportunity all depends on perspective — the glass half-full or half-empty.
One man with a glass-half-full attitude is Bob Henig of Bob’s BMW in Jessup, Md., who started his career in 1981 by selling used motorcycle parts out of his garage. Collecting parts that he knew were in high demand turned into a business where he eventually bought entire old inventories from other collectors and dealers.
“The process of turning obsolete parts into a business opportunity is simple: market the parts to the customers that want them,” Henig says (pictured above in his office). This business process can be applied to any dealership’s obsolete inventory.
While attending a motorcycle rally in Virginia Beach, Henig noticed a private seller with a trailer full of old motorcycle parts.
As he was stacking the parts onto a picnic table, the seller told Henig that he had purchased a dealer’s old inventory and hoped to sell all of it at the rally. During the afternoon he sold only about $50 worth of parts, so Henig offered him $800 for everything that was left.
Early the next morning, Henig sorted through the parts, throwing away about 20 percent that he considered junk. He also took into account the years and models of bikes he saw at the rally and displayed parts for these motorcycles. After organizing, categorizing and displaying the parts, he ultimately sold $2,000 worth over the weekend. The parts that were left had a value of several thousand dollars and were sold over the months and years ahead. There also were a few rare bits that he kept for the motorcycles in his personal collection. (Continued)