Excess and obsolete inventory: a worked action plan for six SKUs, plus an AI prompt

Fictional exampleExample Valve Co., its SKUs and every number below are made up. Recovery percentages are assumptions, shown as assumptions. Don't paste real cost files or export-controlled part data into an AI tool; see the data-safety checklist.

The quick excess-and-obsolete prompt is Prompt 4 in the inventory guide. This page adds what that prompt doesn't: a filled-in SKU table, a decision rule per action, a recovery range per SKU, and the write-down hand-off to Finance.

What's the difference between excess and obsolete inventory?

What rule should you use to flag E&O?

Months of supply = on hand ÷ average monthly usage (use forward demand if you have it). This page uses the same example thresholds as our prompt kit: more than 12 months of supply, or no movement in 180 days. Agree your own thresholds with Finance before the first review.

Which action fits which SKU?

Work the questions in this order (based on the VMA / Swain Smith inventory-disposal procedure's order of options: return to supplier, ask about a restocking fee, transfer, sell to a third party, scrap; Accounting processes write-offs—VMA M2-03-14):

1. Open PO → cancel or push out first
2. Another site uses it → transfer
3. Supplier will take it back → return to vendor (ask about the restocking fee)
4. Superseded but reworkable → rework (engineering approval)
5. Usable by others → discount sale or broker
6. No value → scrap or donate (Finance and EHS rules)

Worked example: six SKUs, $77,300 on hand

Example Valve Co. quarter-end aged-inventory report. Rule: more than 12 months of supply, or no movement in 180 days.

Roll-up: disposition SKUs (all except EX-422) = $70,100. Recovery $35,180–$44,940. Write-down exposure for Finance $25,160–$34,920. Also cancel the $4,500 open PO on EX-422 and hold that SKU as usable stock.

• Cancel or push out open POs first—cheapest recovery, often skipped.
• Excess is not a write-off. EX-422 is usable; the action is to stop buying.
• Show recovery as a range with the assumption next to it.
• Rework and scrap need outside sign-offs: engineering, Finance, EHS.

Download the E&O action-plan template (CSV) with this fictional table filled in.

What to hand Finance

Give them the write-down exposure range and the evidence behind each row. Under FASB ASU 2015-11, inventory measured by methods other than LIFO and the retail inventory method is measured at the lower of cost and net realizable value—"the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation" (ASU 2015-11). Most companies use that rule; your controller decides the reserve. This page is not accounting advice.

Do it with AI

You are an inventory analyst. From the export below (SKU, on hand, unit cost, average monthly usage, last movement date, open PO qty, supersession note, other-site usage), flag every SKU with more than [12] months of supply or no movement in [180] days. For each flagged SKU, pick one action (cancel/push out PO, transfer, return to vendor, rework, discount sale, scrap, hold) and give the reason in one line. Estimate recovery as a low–high range and state the % assumption you used. Never recommend scrapping a SKU with open demand or open orders. Return a table, then totals: value flagged, recovery range, write-down exposure range, and open-PO value to cancel. List every SKU with missing data instead of guessing.

What to check: confirm usage with forward demand; call the supplier before counting RTV money; get engineering sign-off on rework; let Finance own the reserve; recompute one row by hand.

How to stop it coming back

Three common drivers: MOQs that force overbuys, forecast bias (see ChatGPT for demand planning), and engineering changes without a disposition plan. A Crowe working-capital case study listed four related causes of excess: inadequate forecasting and SIOP, poorly managed stocking strategies, insufficient management of procurement parameters, and no product life-cycle guidelines (Crowe). For tool options, see the inventory optimization use case.