Inventory management is a challenge faced by any business selling a product, but the challenge is particularly acute for businesses dealing in products that expire or quickly lose value over time. By giving special attention to perishable inventory and applying the right strategies, tools and techniques, businesses can improve their bottom line by reducing unnecessary losses and making the most of their opportunities — before they expire.
What Is Perishable Inventory or Perishable Stock?
Perishable inventory consists of products that expire or lose value over time, eventually becoming worthless. Sometimes product quality perishes gradually, like a market research report that becomes less relevant (and, therefore, less valuable) as time goes on, and sometimes it happens instantaneously, like the value of a ticket for a seat on an airplane after the plane takes off.
Perishable inventory and perishable stock are often used interchangeably, but, in practice, sometimes they are equivalent and sometimes they aren’t. Perishable stock tends to specifically refer more to perishable goods that can be stocked. Yogurt and floral bouquets are both perishable inventory and stock, while rounds of golf and nights in a hotel are perishable inventory but can’t be stocked in a refrigerated warehouse like yogurt.
While some of the techniques and strategies discussed here apply to all kinds of perishable inventory, the focus is on perishable stock. Revenue management strategies focus on maximizing profits from non-stock perishable inventory, such as hotel nights, airline tickets and rounds of golf.
Video: What Is Perishable Inventory
- Perishable inventory is inventory that expires or otherwise loses value over time.
- Some techniques for managing perishable inventory are the same as, or are similar to, techniques used for other kinds of inventory management, but with perishable inventory there are extra considerations.
- The unique risk of perishable inventory is that unsold products may expire with no residual value, and the entire investment and opportunity can be lost.
- A combination of data gathering, information technology, analytics, relationship building and innovative thinking can make perishable inventory management a manageable challenge.
Perishable Inventory Explained
While some forms of perishable inventory are easily recognized and intuitive, such as food products with printed expiration dates that are never more than a few weeks away, other forms of perishable inventory are less obvious. Some perishable inventory loses its value all at once, such as a theater ticket when the curtain goes up. In the case of a floral arrangement, the value may decline more steadily to zero over time, as value is measured in how many days remain for a customer to enjoy the flowers. In other cases, the decline in value is more of a step function, like a computer chip that goes from state-of-the-art to good to usable to completely obsolete as successive generations get released.
Some perishable inventory isn’t even “inventory” in the traditional sense — it’s really the theater seat, not the ticket, that the buyer wants. The same is true for tickets to sporting events and concerts, group slots for an escape room and any other experiential products that happen at particular times. On the other hand, even with durable goods thought of as nonperishable, the value can still decline over time as degradation or obsolescence happens slowly. Why is a loaf of bread considered perishable while a modern clothes washing machine is not? Both will likely be unsellable a decade or two from now, though the bread will lose its value first. There’s no set rule or cutoff for what makes a product “perishable,” and there are degrees of perishability.
The real question is: How big is the risk of losing inventory — and, therefore, sales and profit — to expiration if the business misjudges demand? The less able a business is to carry inventory forward from one period to another (be it day, month, quarter or year), the more “perishable” it is, and the more the techniques described below will apply. When identifying how perishable something is, it helps to recognize that some perishability occurs naturally (it’s unsafe to eat expired food) while some is artificial (cars don’t magically become terrible once the next year’s model comes out, but their value takes a disproportionate hit on that day). However perishable a business’s inventory is or isn’t, it’s important to use the appropriate techniques to minimize costs and reduce waste.
What Industries Have Perishable Inventory?
Many industries have perishable inventory. Some products just have short natural shelf lives. Products that are organic in nature are often perishable, such as bread, produce, dairy and even health and beauty products. Products requiring refrigeration are usually perishable in one way or another as well, such as pharmaceuticals. COVID-19 vaccines that have a very short shelf life after being taken out of the freezer are a good example.
Technology products can be perishable due to either planned or natural obsolescence as the capabilities of devices improve over time. Product cycles that release new models every year have a predictable at-least-partial perishability, from cars to computer chips.
Experiential products that require a person to be at a place at a specific time are perishable as well, such as the rounds of golf, hotel nights, transportation and entertainment tickets already mentioned. This article won’t focus so much on these, however, as the revenue management techniques for dealing with nonphysical inventories are different.
Business-to-business industries have perishable products as well. Some of them are just larger versions of the business-to-consumer problems (like selling food to restaurants), but others are unique, such as advertising slots in a day’s newspaper or during a television show.
Why Is Tracking Perishable Inventory Important?
Tracking any kind of inventory is important, but tracking perishable inventory is especially critical. Unsold inventory that expires represents a complete loss to the business, and the process problems that result if that happens regularly can be devastating. Inventory tracking can greatly reduce the risk of mistakes that cause inventory to expire, and, when combined with auditing, inventory tracking can identify problems early and provide clues to help track down the source. When every single unit of product has a clock ticking down to expiration, inventory tracking becomes mission-critical for businesses that want to succeed.
How to Manage Perishable Inventory
Managing perishable inventory is an especially difficult inventory management challenge because timing is so much more important when products can expire. The threat of product spoilage is always looming, and anything that costs a business time — be it a delay, a miscalculation, a miscommunication or some other adverse event — can threaten to wipe out your investment on an entire batch of product. Businesses dealing in perishable inventory may also face higher costs for storage and transportation. For example, refrigerated grocery products are more expensive to stock and move than those stable at room temperature.
10 Tips & Strategies for Perishable Inventory Management
The challenge in managing perishable inventory lies in matching supply and demand not just in quantity, but in time. It’s not enough for a business to offer enough product to meet its customers’ needs; businesses dealing in perishable inventory need to meet each customer’s need when they have it, but without having so much inventory left over that losses from expiration become too costly.
Here are 10 tips and strategies for managing perishable inventory:
FIFO: “First In, First Out” can refer to both an accounting method for determining valuations and an inventory management process. The assumption under either type of FIFO system is that inventory leaves in the order in which it comes in. From an accounting standpoint, this means that unsold inventory on the balance sheet is the most recently arrived inventory. In inventory management, it means that among functionally identical items (same SKU, if that’s applicable), the one that’s been in stock the longest is the next to be sold, to the extent that the business has control over that.
In accounting situations where your choices are FIFO vs. LIFO (Last In, First Out), FIFO makes far more sense for perishable inventory, since LIFO assumes that the oldest item in stock never sells until all the newer units are sold. In inventory management practice, FIFO makes sense because when an item “comes in” is usually correlated with when the item expires.
FEFO: Not every business dealing in perishable inventory is in a position where FIFO alone is sufficient for managing stock with respect to expiration dates. This is where FEFO comes in: “First expiring, First Out”. Managing inventory by FEFO is very intuitive: The next unit sold is the one with the most imminent expiration. This keeps the remaining shelf life (or equivalent life) of the remaining inventory as long as possible, giving sellers the maximum opportunity to sell each unit of inventory before expiration.
When should one use FIFO vs. FEFO for inventory management? This is the logical next question after comparing the two. FEFO works better when expiration is sudden and closer in, while FIFO works best when expiration is more gradual and more correlated with the order in which units arrived. For example, a business selling computer chips may find FIFO the easiest to use, since there’s no set expiration date as technological progress renders units slowly less valuable over time, while a business selling consumable products with printed expiration dates can get a lot of inventory management improvements by adopting a FEFO system.
Inventory tracking: Inventory tracking is exactly what it sounds like, keeping track of inventory. That means knowing what inventory you have — including what’s on its way in and out, how much of each type of inventory you have, where everything is and basic facts about each unit (such as when it expires). It also means knowing where the inventory is coming from and where it’s going when sold. Some inventory tracking processes include payment tracking as well, connecting financial records with units bought and sold. Ideally, anytime something happens to a unit of inventory, it gets tracked. With increasingly few exceptions, this is a job for high-quality inventory management technology.
A good inventory tracking system provides current data whenever you need it, answering important questions in real time such as “How much inventory expires in the next week?” or “How many unexpired units can I expect to have in stock tomorrow?” Inventory tracking provides data essential to making good decisions and reducing the chances of costly mistakes, like ordering too much or not being able to fill a customer’s order. Proactively, if you see that you have excess inventory that will expire soon, you can run a promotion to get rid of it at a discount, helping recoup some of the COGS instead of writing it all off. Another key benefit of good inventory tracking is diagnosing process problems like errors or theft — if you don’t know how much of something you should have, it’s hard to figure out what’s missing and even harder to track down what might have happened.
Inventory auditing: In an ideal world, inventory tracking would provide 100% of the information a business needs to manage its perishable stock. Every unit that gets bought, moved, sold, written off, given away or otherwise had anything done to it gets tracked in the system. In real life, however, not everything that happens to inventory makes it into tracking.
Human error is a common source of discrepancies, either in data entry (that is, something that should have been entered into the tracking system is missed or entered with errors) or in execution (for example, a restaurant keeping track of liquor might have a theoretical number of shots per bottle of vodka, but that doesn’t account for an extra generous pour from one bartender or a customer asking for a weaker drink). Other sources of discrepancy may be more by design, either innocuous, as in the case of an inventory management system that wasn’t designed to account for odd one-off happenings, or malicious, as in the case of purposeful damage or theft.
The solution is regular inventory auditing: examining your physical inventory, comparing it to your records and investigating any discrepancies to determine the cause. This is especially important for perishable inventory because not only can issues like wasteful mistakes and theft cause actual inventory to be lower than the theoretical inventory from a tracking system, but, in some cases, inventory can perish early. Maybe a refrigeration truck was running at too high a temperature or part of a shipment was left out in the sun for too long at a transfer point on its way to the warehouse. Whatever the reason, some perishable inventory may naturally expire before its official expiration date and recognizing that possibility is critical to ensuring adequate supplies and tracking down process problems in storage and supply chains.
Demand forecasting: Demand forecasting is a valuable tool for managing perishable inventory, especially in categories like food and beverage where expirations can happen quickly and restocking doesn’t happen fast enough to meet sometimes sudden demand fluctuations. A restaurant can’t usually order ingredients when a big party walks in — it has to be ready in advance. With data and experience, businesses learn what are their busy times of year, busy days of the week — even busy hours of the week — and what special events may increase or decrease demand. Making demand forecasts, which are often functionally synonymous with sales projections, allows businesses to plan ahead better. In the absence of company-specific data, businesses can use industry forecasts and knowledge of general trends while making adjustments for local idiosyncrasies. But with experience and good data tracking, businesses can develop more robust forecasting capabilities. Merging sales forecasts with inventory tracking and auditing can provide detailed guidance on how much to order from suppliers to meet customer demand while minimizing waste.
Another important way to forecast demand isn’t so much a formal forecasting technique as it is a tried-and-true tradition: building good relationships with customers. The better a business knows its customers, the better it can predict what they’ll need and the more likely those customers will be to give the business advance notice when things are changing. This is just one of a thousand excellent reasons for businesses to value customer relationships and feedback, but it’s an important one for businesses dealing in perishable inventory.
Invest in technology: Every strategy discussed so far is made easier and more powerful with information technology. Businesses start with spreadsheets, but more sophisticated inventory management software often is worth the investment even at surprisingly small scales, including single-location retail businesses. Good systems will make it easier for users to integrate data and plan from both financial and operational standpoints. Technology systems that give real-time (or very close to real-time) updates are especially useful for quick adaptations. Receiving the soonest possible alerts for problems is an obvious upside. If a customer is trying to negotiate for a better price, a good inventory management system could tell exactly how many units might make sense to discount and how many are far enough from expiration that you can wait for a better offer.
Safety stock: Safety stock is a concept that applies to manufacturers, retailers and even individuals. It’s the little bit extra of something kept around, above the predicted need, for those “just in case” scenarios. Manufacturers making a little more than their customers order, stores keeping some extra units in the back room that they don’t think they’ll need, and individuals packing some extra sunscreen and socks on a trip are all examples of the safety stock principle in action. It’s being prepared for both good and bad needs, from an unexpected spike in demand to an unpredictable adverse event that renders some of your stock unusable.
When inventory is perishable, however, safety stock is a little riskier and less intuitive. Stocking a few extra units that probably won’t sell quickly isn’t a big deal if a business has the storage space and knows the units will sell eventually. But with perishable inventory, retaining safety stock borders on deliberate waste, since it means stocking units you expect to go bad.
Manufacturers of durable goods often use formulas to determine their amount of safety stock to make sure they’ll never run out of inventory should customers need it. If disappointing a customer would be disastrous for your business, you may want to keep an ironclad level of safety stock on hand even if it is perishable inventory. But that can also mean throwing away worthless inventory for several days just to avoid telling one customer, “Sorry, we’re all sold out at the moment”.
Each business must carefully examine its particular circumstances to decide how much safety stock to keep on hand. A frozen yogurt shop running out of a flavor is a routine event that produces almost zero negative effects for customers, whereas a hospital running out of O-negative blood could be a matter of life and death. The more costly it is to run out of something, the more safety stock a business needs. But with perishable inventory the answer is almost always somewhere between zero and the amount that would be stocked if the inventory were nonperishable.
Build supplier relationships: Suppliers are a business’s most important partners in serving customers. If the suppliers don’t deliver, the business can’t deliver. That’s why building good relationships with suppliers is important. A good working relationship and mutual trust create a lot of advantages for both parties. While many argue that a good relationship can result in better prices (and that’s sometimes true), other benefits are less direct and tangible. Friendly suppliers may be more willing to make exceptions or offer flexibility that helps the business better serve its own customers, and the more the supplier understands a business’s needs, the better the recommendations they can offer — after all, they know their own offerings and what’s in their pipeline better than you do. But the biggest benefit of having a good relationship with suppliers probably comes when things go wrong. A good supplier with which your business has built trust will value that relationship and may offer help and flexibility when your business needs it most.
Diversify supply chains: Diversifying supply chains has always been important, but in recent years it has become absolutely critical for many businesses. Having only one possible supplier for a key input with no alternatives creates a single point of failure that can disrupt an entire company. In 2020 and 2021, we’ve seen businesses unable to ship otherwise excellent products for lack of a single component, be it a glass jar or a computer chip.
There are three different kinds of diversity to consider when attempting to make a supply chain as robust as possible:
Redundancy: Having more than one supplier of critical components provides redundancy in case one suffers a major reduction in capacity. While many businesses figure this out when it comes to specialty inputs that are rare and critical to making a high-quality product, more humdrum, essential inputs often are considered easy to source and consequently get overlooked. The last year has seen perishable inventory expire at least two steps removed from the end consumer for lack of containers in which to ship, and businesses have learned the hard way that building redundancy into the sourcing of boxes, jars and bags can be as important as having contingency plans for the inputs that make a product special. A perfect product does you little good if it can’t get to your customers.
Flexibility: Can suppliers keep up with the changes to your business? In normal times, this is less important, as changes tend to happen with more deliberation and planning. But especially during the early days of the COVID-19 pandemic, some changes were forced and abrupt, and inflexible supply chains led to shortages. For example, a company that produced 20-pound bags of shredded cheese for restaurants lacked the ability to produce 1- or half-pound bags for retail consumers; as dining shifted to more eating at home, the dairy’s otherwise fine product couldn’t reach its new customers.
Geography: Geographic redundancy in supply chains is a form of resilience that is growing in importance. Sudden changes in political arrangements (such as tariff levels) can cause unpleasant shocks to a business model, and regional disruptions caused by natural disasters (such as large wildfires and hurricanes) are increasing in both frequency and severity. When a company’s sourcing of critical components grows geographically concentrated, that business is more vulnerable to a single adverse event.
Diversifying supply chains comes at a cost, however, and it’s important to realize that diversification may increase management burdens and decrease economies of scale. With perishable inventory, however, diversification is more important, because disruptions to the supply chain can result in huge losses of product, not just delays in delivery.
Make inventory less perishable: This one sounds like wishful thinking. “Oh, well, if the problem is that the products go bad, can we just make them stop doing that?” Usually no... but sometimes yes. Especially in the case of food products, perishable inventory going bad represents a lot of effort and money gone to waste, usually with a negative environmental footprint and nothing to show for it. The US Department of Agriculture estimates that 30-40% of the domestic food supply winds up wasted, at a cost of more than $160 billion. This is a big reason to improve management of perishable inventory, but it’s also an incentive to innovate technologies and practices that reduce waste.
The food industry is already seeing progress. Organic milks pasteurized at higher temperatures have a much longer shelf life than milks pasteurized the “regular” way, as do many vegan milks. Orchards can now spray their fruits with a nontoxic chemical that washes right off to prolong the life of picked produce. There are even bread bags that slow the rate of spoilage and mold growth within the bag. And more innovations are coming out every year. If you’re in an industry where waste due to expiration is a major issue, be constantly vigilant for innovations that could reduce the severity of the spoilage problem. Early adopters of innovations that make perishable inventory less perishable stand to gain substantial advantages and savings.
Manage Perishable Inventory With Software
Inventory management is aided by good information technology. And when it comes to perishable inventory, it’s especially important to get real-time information and analytics when making decisions. Software can provide many benefits (some discussed above), but one big help a good system can provide is to bring data from different business functions together. Being able to view perishable inventory alongside nonperishable inventory, see supplier orders that are coming in and need to be placed, and keep track of sales and margins in real time is an extremely valuable capability to have in a single software system that can draw on pooled data. When making decisions about perishable inventory, where the costs of bad estimation can be high, good software can be the difference between making guesses in the dark and taking a data-driven approach in pursuing profitable opportunities.
Ideally, an inventory management software solution will scale with a business, offering something affordable to smaller companies and then growing with them — until, ultimately, providing very sophisticated capabilities when they become large enterprises. Enter NetSuite Inventory Management, which offers flexible, scalable, cloud-based software to support businesses of any size in better tracking and managing inventory of all kinds, including — and especially — perishable inventory.
Managing perishable inventory is a particularly difficult form of inventory management because the expiration of products requires a near-constant matching of supply and demand. Stocking too much can be far costlier than with durable goods, and the risk of financial loss can be greater if products expire unsold. Fortunately, the tools for demand forecasting and inventory management have never been better. From collecting and analyzing data to managing relationships with suppliers and customers, there are many tried-and-true techniques for improving perishable inventory management. And we can see those techniques working all over the world, amplified in capability by modern software: Even small businesses today are able to manage perishable inventories in global supply chains during unpredictable times.
Perishable Inventory/Stock FAQs
How do you manage perishable inventory?
Managing perishable inventory is essentially inventory management in situations where time is a pressing factor. Good management of perishable inventory involves trying to match supply with demand as closely as possible. On the demand side, data collection and analysis, forecasting and pricing strategies are all possible ways to improve a business’s inventory management. To the extent the business is able, it can adjust the amount of the product it has to sell (by ordering or making less). In situations where that’s difficult, like with airlines and hotels, revenue management strategies are more applicable.
What is a perishable product?
A perishable product is one that has an expiration date after which the product has little to no value and cannot be sold. Typically, products that have an expiration date far in the future are not considered perishable, or are sometimes considered to be less perishable. “Far in the future” here means far enough that the expiration of the product is not something the seller typically has to worry about, such as canned soup that can sit on grocery shelves for a year or more.
What are examples of perishable items?
Perishable items include foods like dairy and produce, organic decorations like cut flowers or Christmas trees, and more. Items that don’t physically change but lose their value can be considered perishable items. Consider newspapers, most of which are impossible to sell after the day of printing. Not all examples of perishable inventory are physical items, however: Hotel room nights, seats on airline flights and rounds of golf all “perish” (expire worthless) after the night is over, the flight has taken off or the tee time has passed.