Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Abnormal Spoilage

What it is:

In the business world, abnormal spoilage refers to the unusual loss of goods or work in progress.

How it works (Example):

Company XYZ is a restaurant chain that orders a lot of produce, which it keeps in walk-in refrigerators. Nature is fickle, and sometimes business is slower than expected, which leads to some of the produce spoiling in the normal course of business. Company XYZ has determined that it normally has to dispose of 5% of its produce before it can be used.

In the last three months, however, Company XYZ has noticed that the spoilage rate has spiked to 15%. After performing an audit of its stores, Company XYZ determines that the managers at several locations were keeping the refrigerator too warm in order to reduce the stores' electricity bills. This was leading to abnormal spoilage.

Why it Matters:

Abnormal spoilage is a red flag. Companies must find ways to detect and measure spoilage in order to keep costs under control, and if spoilage suddenly becomes abnormally low or high, this may be a sign of larger underlying problems in the manufacturing process. Abnormal spoilage reduces profits.