What is Dead Stock? Causes of Dead Stock and How to Manage Successfully

What is Dead Stock? Causes of Dead Stock and How to Manage Successfully

dead stock meaning

 

Dead stock. The name alone sounds ominous, like something straight out of a horror movie.

Yet unlike the vampires and masked killers of the late-night creature features I grew up with, dead stock is a real threat to your business and something that should keep you awake at night.

Today, we’ll tell you how to stop dead stock from killing your company. No garlic or crucifixes required.

What is Dead Stock?

As the name implies, dead stock is stock that’s just languishing in your warehouse for an extended period of time. It’s stock that doesn’t sell and has a high likelihood of never selling.

Dead stock represents lost revenue because you’re paying for stock that isn’t selling, and you’re paying to store that stock too. It’s taking up space in your warehouse and on your accounting sheet.

Seasonal items are often cited as the most common examples of dead stock. Any 2020 calendars you had leftover after January 1st, 2021 are essentially dead stock, because it’s incredibly unlikely you’ll ever sell them.

However, dead stock isn’t just seasonal items that are past their prime. Upgraded product variants can make older models obsolete, turning them into dead stock. And sometimes companies just overorder on items that will never sell.

Dead stock can easily become one of the biggest revenue drains for your business, yet most companies fail to realize just how much dead stock sitting in their warehouses is impacting their bottom line.

Determining if you have dead stock items in your stock rooms and warehouses and then figuring out how to prevent taking on more unsellable products in the future is a key way to positively impact your company’s revenue.

Why is Dead Stock a Bad Thing?

Many times, companies are in denial about their dead stock levels. Unwilling to admit they’ve made a mistake, they’ll justify their dead stock as “emergency stock” or a stockpile for future sales that just haven’t happened yet. Sometimes they’ll insist these items are just slow movers and that they’ll sell the products “eventually.”

In some cases, they may actually be right. There’s nothing wrong with keeping emergency stock on hand to head off unexpected supply issues. Some items are not fast sellers, but do sell over time.

The problem is that overstocking these items and creating dead stock costs you money you didn’t have to spend.

Is it better to order a three years supply of a product today and stockpile it for the future, or is it smarter to order just what you need now and continually replenish as needs dictate?

Obviously, it’s the latter.

Here are four of the key ways that dead stock costs your business money:

· Lost opportunity

Dead stock takes up space, and that space could be used to warehouse items that would actually sell and generate revenue for your business.

For most companies, physical inventory space is limited. You can’t carry every item on the market. Wasting space on products that have no chance of selling means you’ve lost the opportunity to stock other products.

· Lost revenue

Obviously, lost revenue is another way dead stock costs your business.

You’ve paid for the items sitting in your warehouse. If you never sell them, you never recoup that investment.

· Holding costs

Holding costs cover all the costs you incur while sitting on dead inventory. Storage, insurance, utilities, and so on are all common holding costs. The longer items sit on shelves, the more these costs increase.

· Employee costs

Most people don’t realize it, but dead stock often leads to an increased need for employees.

All of that inventory sitting in a warehouse takes up space, needs maintenance, and so on. This often means businesses will hire additional workers to manage the load.

This is why dead stock is a bad thing for your business. It represents money and resources wasted.

For most businesses, dead stock sits on shelves taking up space until it’s forgotten. The fact that no one realizes there was a stock issue in the first place causes a compounding element as more excess stock is ordered.

Businesses tie up a lot of money in inventory. Dead stock represents dead money. You’ve spent it, but you do not see a return. And you might never see a return. That’s not a sound plan.

What Are the Causes of Dead Stock?

The causes for dead stock are wide-ranging but tend to fall into a few broad categories. Let’s break them down.

1. Inconsistent Ordering

The biggest and most obvious cause of dead stock issues stems from inconsistent ordering.

Inconsistent ordering boils down to ordering the wrong amount of an item or product (in this case, too many) or ordering them at the wrong time. This is often caused by not understanding your inventory turnover rates or how often you’re selling and using the things you’re ordering.

Solving this issue isn’t overly complicated. If you set up reorder points, learn your inventory turnover rates, or set inventory par levels, you will have a better understanding of not only how often you sell items, but what inventory levels you need to maintain to prevent stock outs and lost sales.

If you add in a calculation for Economic Order Quantity, you’ll not only know when you should reorder items, but you’ll also use a formula to determine the exact amount of items to purchase.

Inventory management software is a great tool to help you eliminate ordering inconsistencies. IMS will offer reports on turnover rate, allow you to set par levels, and monitor items so you can avoid dead stock issues completely.

2. Poor Sales

The second factor that can lead to dead stock is poor sales.

This one’s a little harder to solve than ordering inconsistencies because you don’t always know how items will sell, particularly if they’re new.

Even the best market research can be wrong, leaving you with an overstock of items that are never going to leave your warehouse.

Seasonal items can wind up in either this category or the inconsistent ordering category. It’s imperative that you order seasonal items with an eye on historical sales data. Otherwise, you will wind up with dead stock items.

If you find yourself in a poor sales dead stock situation, the best course of action is to often reduce prices dramatically to clear dead stock out of inventory. Even selling at a loss is better than not selling the items at all.

3. Defective Products

Finally, in some instances, you’ll end up with dead stock because products are defective.

If you manufacture your items, you’ll need to resolve your quality control issues. If you purchase your products from another manufacturer and re-sell them, it’s important to check the products before receiving them into inventory.

You can also get around these issues by utilizing packaging requirement standards to lower the chance of things being damaged in transit, setting accepted quality limit standards (which clearly define how many defective items you will accept per order), and ensuring your product specifications are detailed and accurate.

Recognizing the three key areas where dead stock occurs can help you prevent the problem before it happens.

How to Avoid Dead Stock

Being aware of what dead stock is and what causes it is just the first step on the road to preventing it from crippling your business.

Let’s talk about how to avoid dead stock entirely.

· Use inventory management software

We touched on this in the previous section, but it bears repeating: one of the most effective ways to prevent dead stock is by managing your inventory. The best way to manage your inventory is with inventory management software.

These programs will give you a better understanding of how product is moving through your warehouse, prevent shipping errors, and help you to maintain proper stock levels on all products and materials.

Many companies worry that an IMS is too expensive or too complicated for their business, but this is not the case. There are options available for every business and budget. You simply have to decide what your specific needs are and sign up for demos to find a perfect solution.

· Conduct customer surveys

Poor sales are often attributable to poor planning and research.

While there’s no such thing as a guarantee in sales, you can at least head off potential dead stock issues by regularly polling your customers about their interest in your products.

If customers don’t respond well to polling for a new or established item, you’ll want to adjust your stock levels and orders accordingly.

Customers aren’t always transparent when taking polls, but at the very least, you’ll wind up with a ballpark idea that will allow you to determine realistic amounts of inventory to keep on hand without carrying dead stock in the process.

· Do test runs for new products

Beyond the surveys of customers, it’s also a good idea to err on the side of caution when it comes to your stock of new items.

Smaller quantities of new products ensure that you’re not caught sitting on a mountain of unsellable items should your customers not respond positively to your latest offering. Beyond that, it can sometimes create excitement as a new product seems “scarce” or in high demand.

· Do your research

Too often, sales and inventory decisions are based on gut feelings and emotions. Eliminate this practice whenever possible.

Today’s software provides you with a full suite of analytics tools that take the guesswork out of inventory management. It’s possible to make accurate, data-driven forecasts for sales and inventory needs based on previous numbers and current conditions.

You wouldn’t go to a psychic to determine how much inventory to order, so why would you make these decisions based on feelings and your gut?

How to Manage Dead Stock

No matter how well you plan, there might come a time where you actually wind up with dead stock in your inventory. What should you do if this happens? We’re glad you asked.

· Lower the price

We mentioned this one earlier, so we won’t spend a ton of time on it here.

If you have a bunch of items you just can’t sell, the most obvious solution is to lower the price. Put the items on sale. Mark them as clearance. Sell them at a loss. Whatever you decide, getting any return on investment with dead stock is better than eating the entire order cost as a loss.

· Bundle items

Another strategy involves bundling your dead stock products with more popular items.

Bundle packages take two (or more) similarly themed items and combine them into one package. The price of this package is less than buying the two items individually in order to entice buyers to make the purchase.

Again, you might not recoup your full investment on the dead stock, but a bundle option will allow you to get the items out of inventory and recover some of the money you spent.

· Free giveaway

If you can’t move the product by bundling it or reducing the price, consider adding it as a free gift item with another purchase.

This won’t likely help you get back the money you’ve sunk into the dead inventory, but offering the product as a free gift can get it out of your warehouse (which saves you money) and may actually entice customers to buy the main product because the free item sweetens the deal.

· Wholesale or liquidate

If you’d like to move the dead inventory quickly and aren’t worried about taking a loss, this method is a lot like a clearance sale.

If the products are in good, saleable condition, consider wholesaling them to another company or liquidating the inventory entirely.

· Donations

If you simply cannot move your dead inventory, donating it might be an option.

While you won’t get any cash for the items in the form of a sale, there are financial upsides to doing this. Donations get the items out of your warehouse, eliminating carrying and maintenance costs, you’ll get a tax write-off for the donation, and you can use the charitable donation as marketing to show you support important causes.

· Return to Supplier

If you wind up with excess inventory that you can’t sell, it’s always worth a shot to reach out to your supplier and see if you can negotiate a return.

You might not get the full purchase amount back, but eliminating dead stock and getting any sort of return is a win.

This is something to try on a case-by-case basis. Many suppliers will refuse, but it’s worth exploring if you’re in a situation where dead stock is choking the life out of your business.

Final Thoughts

Dead stock is an inventory management issue that doesn’t get as much attention as it deserves. Carrying excess stock that you cannot sell can hurt your business in a variety of ways, and it often compounds over time.

The good news is that it’s easy to spot dead stock. If you find you’re carrying excess inventory you can’t sell, the best practices highlighted in this article will help you prevent the problem from happening again.

In the end, most dead stock issues boil down to poor inventory management. Consider employing inventory management software or other tools to help you keep your warehouse in order, and you’ll have fewer issues with items dying on your shelves.

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