Obsolescence refers to an asset’s life or lack thereof. When an asset becomes old and outdated, it is considered obsolete and useless. This is a big problem for both manufacturers and retailers. Obsolescence risk is the risk that a process, product, or technology used or produced by a company for profit will become obsolete, and thus no longer competitive in the marketplace. This would reduce the profitability of the company.
Explanation :
Manufacturers main concern with obsolescence is in their fixed assets or plant assets. Manufacturers spend large amounts of their budgets on machinery and equipment to help produce products. What happens when their equipment is outdated and isn’t useful? The equipment becomes worthless and can’t be used anymore. A good example of machinery becoming obsolete is the manual drive press. No manufacturer uses a drill press that is operated by a person. It is far too slow for mass production. Instead, modern manufacturers use CNC or computer navigated machines to drive and shape products. Once a manufacturer has a CNC machine, the stand-alone drill press is pretty useless.
In a nutshell :
- Obsolescence risk arises when a product or process is at risk of becoming obsolete, usually due to technological innovations.
- Reducing obsolescence risk means being ready and able to make capital expenditures and investments in new technology and processes.
- Technology-based companies or companies that rely on technological advantages are most vulnerable to obsolescence risk.
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