Definition: Obsolescence refers to an asset’s life or lack there of. When an asset becomes old and outdated, it is considered obsolete and useless. This is a big problem for both manufacturers and retailers.
What Does Obsolescence Mean?
Manufacturers main concern with obsolescence is in their fixed assets or plant assets. Manufacturers spend large amounts of their budgets on machinery and equipment to help produce products. What happens when their equipment is outdated and isn’t useful? The equipment becomes worthless and can’t be used anymore.
A good example of machinery becoming obsolete is the manual drive press. No manufacturer uses a drill press that is operated by a person. It is far too slow for mass production. Instead, modern manufacturers use CNC or computer navigated machines to drive and shape products. Once a manufacturer has a CNC machine, the stand-alone drill press is pretty useless.
Example
Retailers have the same problem as manufacturers only with their inventory. Clothing and apparel retailers have the most difficulty with obsolescence. Think about it like this. Every season and every year clothing styles change. Retailers can’t afford to sit on outdated fashion. No one will buy it. That’s why every clothing retailer has end of the season sales. They need to get rid of the inventory before it becomes obsolete and worthless to them.
Both manufacturers and retailers have to carefully plan their purchases. It is difficult to predict when something will be obsolete. Even experienced companies can’t always predict how much of machinery or how much of product to buy. Demand and innovation is always changing.
