On the balance sheet, inventory is always considered an asset—but what about in real life? If the inventory serves a useful purpose—filling customer orders, acting as a buffer between manufacturing operations that operate at different speeds, protecting you from stocking out due an unexpected spike in demand or late deliveries from suppliers—then it is indeed an asset.

However, what about inventory that has just celebrated its 5th anniversary in your facility? What of spare parts that will fix a machine that was scrapped two years ago? What about inventory that is six months past its expiration date? What of an item of which you currently have 4,500 in stock, which generate sales of 15 pieces a month?

Would you truly call these assets? Of course you wouldn’t call them assets. Over the years I’ve noticed that companies often fail to recognize the extra costs of storing inventory, inventory carrying costs, and the costs of inventory related taxes and issuance.

The problem—how can you tell the difference? Subjecting your inventory to a thorough statistical analysis can help you separate the productive inventory from the inventory that is just taking up space, costing you money or heading towards obsolesce. This can be done by determining the months of inventory by item that you have on hand. Conducting an ABC analysis can help you determine if your order profile is correct, or possibly adding to the obsolete inventory. After identifying excess and obsolete inventory, you can identify opportunities to dispose of it in a manner that is as financially painless as possible. This makes for a flexible, dynamic supply chain that quickly responds to market demands and fosters high-level customer service.