When Is Expired Inventory Acceptable?

Some items will have a limited time in which they are useable due to a time-induced deterioration in their physical qualities.  This “shelf life” should be considered when determining the reorder process for replacement inventory.  It is fairly obvious that you would not order a six-month supply of an item that has a shelf life of 120 days (approximately four months).  This would be true even if there were certain discounts associated with the purchase volume for a particular item unless the discounts are so significant that it would not matter that a portion of the inventory would be discarded from time to time.  For example:

•          Assuming product A has a shelf life of six months and a usage rate of 62 per month.  If you had the option of placing one order of 500 for $3.20 each or multiple orders of 200 for $4.50 each as necessary, what would you do?  The total purchase price for the quantity of 500 would be $1,600.  However, at a rate of 62 per month you would actually use only 372 before the shelf life expired.  The 128 time-expired items will have to be discarded resulting in waste and then be replaced with an additional expenditure of $409.60 (assuming the same purchase price).  On the other hand, if you placed two separate orders for 200 each (three months apart) at the higher rate of $4.50 the total cost would be $1,800 without the waste associated with time expired items.  And you would still have 28 items in inventory with an additional shelf life of three months.  Would your decision be different now?  The cost of the discarded expired items is high enough to make it more economical to purchase the lower volumes at the higher unit price.

Purchase Qty	Original Purchase Price	Additional Cost  for Time Expired	Total Cost
500	$1,600.00	$409.60	$2,009.60
200 x 2	$1,800.00	$0.00	$1,800.00
Net savings in purchasing two orders of 200 items			$209.60

•          Now assume product B has a shelf life of six months and a usage rate of 75 per month.  If you had the option of placing one order of 500 for $3.20 each or multiple orders of 225 for $4.40 each as necessary, what would you do?  The total purchase price for the quantity of 500 would be $1,600.  At a rate of 75 per month you would use 450 before the shelf life expired.  The 50 time-expired items will have to be discarded resulting in waste and then be replaced with an additional expenditure of $160.  On the other hand, if you placed two separate orders for 225 each (three months apart) at the higher rate of $4.40 the total cost would be $1,980 without the waste associated with time expired items – you would have zero items left in inventory.  What would your decision be this time?  The higher usage rate reduces the number of items left to be discarded when the self life expires.  Therefore, the overall cost of discarding the 50 items relative to the purchase price is sufficiently low to justify the larger purchase quantity and allowing the remaining time expired items to be wasted.

Purchase Qty	Original Purchase Price	Additional Cost  for Time Expired	Total Cost
500	$1,600.00	$160.00	$1,760.00
225 x 2	$1,980.00	$0.00	$1,980.00
Net savings in purchasing one order of 500 items			$220.00

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