Computing the cost of obsolete items

If an item has a long order interval, the item can become obsolete at a time when you still have a lot of inventory left.

This risk is important for products with short life cycles. For example, products which are influenced by fashion or fast technological developments.

The Risk Percentage by Day field in the Resource Cost Values (cprao3120m000) session expresses the chance per day that an item becomes obsolete.

The cost of becoming obsolete is calculated as follows:

Costs = (RP/100) * OI * C

Where: RP = risk percentage OI = order interval [days] C = standard cost

Example

The sales of an item declines. You do not know when the last sales order will close, but you estimate that sales of the product will be discontinued in the next 200 days. A reasonable estimate of the risk percentage is 0.5%.

Data: C = 20 $ (standard cost) OI = 120 days (order interval) RP = 0.5 %/day (risk percentage)

Costs = (RP/100) * OI * C

Result of the calculation: The cost of becoming obsolete is $12