Hi there,
I work for a rather large supply company as well. When we have large items go out of stock we repurpose existing pages to advertise new pages. If it is a small product, like a part or something, we 404 the page.
This is an example of a repurposed page: http://www.apelectric.com/6241-Generac-Guardian-Series-14kW-p/6241.htm
404 errors are not a negative thing per say. Of course you don't want hundreds of them because it creates a negative user experience. If a product is truly discontinued, it is better to let the searcher and the engine know that. No following the pages isn't the best idea because it can prevent traffic from getting to your site. We have about 87 404 pages and they have not influenced our organic rankings. I don't recommend 301 redirecting product pages because it can be misleading to the searcher. For example, we rank really well for the Generac 6241. I wanted to 301 that URL to the replacement model, but if someone types in Generac 6241 and lands on Generac 6461, they are probably going to bounce right off the page. That is not good either. One thing I have done in the past is redirect the product page to a related category page. So, the Generac 6241 could have been redirected to the Air Cooled Generators page. I think this was the better way to do it however.
If a page has value, and can be used as a way to direct traffic to another source that is my favorite way to handle discontinued products. At the end of the day, a $15 part doesn't justify the amount of time it will take me to redesign the page, so I let it become a 404 error.
This is a video from Matt Cutts at Google on how they handle 404 pages. https://www.youtube.com/watch?v=oya9Pl7ukNo