What is most efficient way to calculate excess and obsolesence reserves for aftermarket spare parts?
The best way is to determine what “metrics” have historically indicated that a product is obsolete or you have excess inventory. From there, you can set a policy for writing it down. For example, you may determine that if you have more than 1 year of forecasted sales on hand, it is considered excess. Company policy could then be to write-down excess to 80% of cost. Of course, it helps to be able to justify why 80% is the right amount (i.e. company sells at 20% less than cost to move inventory; or you have ability to return to vendor less 20% restock fee). The ultimate goal is to state inventory at the lower of cost or realizable value. If you have high margins, it may never be an issue because you would never sell below cost, although you may reduce your sales price. I have seen several clients who develop a list of criteria. Any item meeting the criteria are evaluated. Otherwise, no reserve is justified.
