Inventory management is a skill that requires careful analysis of buying patterns. Knowing how much to order or produce can help businesses satisfy their customers without wasting capital. However, even the most sophisticated data analysis can sometimes lead to overproduction or overordering. This leads to a company having stock that doesn’t turn over (or sell), called dead stock.
What may seem insignificant can threaten a business’s viability over time. It impacts cash flow and revenue and consumes warehouse space. This article takes a deeper look at what dead stock is, its business impacts, and a few inventory management tips to ensure businesses can cut losses and boost profits.
Table of Contents
What is dead stock?
Negative impacts of dead stock
3 tips to manage dead stock
Final thoughts
What is dead stock?
Dead stock, as we’ve already mentioned, is the inventory that doesn’t sell anymore. There’s little chance that it will be sellable in the future because it is expired, obsolete, and low in quality. It ties up revenue and warehouse space, negatively affecting business profits. Here’s a quick look at different types of dead stocks:
- Expired products: These items are lifted off the shelves because their expiration date has passed. These could include the usual grocery items like medications, cosmetics, and foods.
- Seasonal items: This group includes products that were highly demanded during a specific season but failed to sell once the peak season was over. It relies primarily on trends, but there’s a chance for some products to sell in the next season.
- Damaged goods: This category refers to products that are not in their original condition or have lost their quality.
- Discontinued goods: These are the products that don’t fit market demands because of technological developments, new sales trends, or updated versions. For example, winter coats may become obsolete stock for clothing industry retailers if there are new colors or fabrics trending the next year.
According to an estimate, 20% to 30% of company inventory becomes dead stock. This is a cause of concern for business owners because there’s no chance of them selling in the near future, and it eats up their valuable inventory space.
Negative impacts of dead stock
Dead stock can negatively affect a business. It influences capital management, increases carrying charges, and causes regret to business owners for wasting business money. A few problems dead stock can bring for businesses are:
- High holding costs: There are different ways to store inventory, but the results are always the same. The more inventory a business stocks, the higher its costs. This obsolete stock consumes space which could be used to store the latest products. It’s advisable to audit the inventory and remove the items that are less likely to sell.
- Increased staff costs: A poorly handled inventory management system often means more stock lying on shelves than needed. The workforce has to move, count, and dispose of the stock, leading to high staffing prices. This is also an opportunity cost to dead stock. The valuable time that could be devoted to revenue-generation activities goes into dead stock management.
- Affects business analytics: The presence of excess stock makes it challenging to calculate inventory turnover and make accurate forecasts. This can create problems when making strategic business decisions.
- Risk of poor reputation: Slow-moving stock, unsold products, and regular clearance sales may raise public concerns. It can negatively affect a business’s reputation and damage customer’s trust.
- Reduces profit margins: Even if a business succeeds to sell dead stock, it is likely at unimaginable discounts. This can lead to significant business losses. The increased time and money required to market obsolete stock can be higher than purchasing it from the manufacturer in the first place. Plus, the business spends more time dealing with unsellable products and there’s less focus on profit-bearing items.
Dead stock inventory can be detrimental to the financial health of a business, whether it’s in the wholesale or retail industry. It ties up capital that could be used in more profitable business windows and limits their ability to produce/purchase new goods. They are unable to run effective marketing campaigns, which leads to losses if inventory stays unsold.
3 tips to manage dead stock
Preventing dead stock is always more effective than dealing with it later. But even the most high-end brands could go wrong with their inventory management systems. For example, Nike faced losses exceeding USD 100 million in the early 2000s due to inadequate testing of its new inventory system.
The introduction of AI in inventory management and advancements in demand planning software have made it easier to keep businesses from harrowing dead stocks. The business can then refocus its energy on improving its topline outcomes.
- Liquidate dead stock
Every day that dead stock is lying in your warehouse is another day of reduced profit margins. Thankfully, there are various ways to cut these carrying costs and free up the business money to invest in other business segments. Some strategies to offload dead stock are:
- Consider donating your dead stock for a potential tax write-off.
- Reach out to suppliers to explore buy-back options for excess inventory.
- Sell your dead stock to liquidators at a discounted rate.
- Bundle dead stock items with popular products to encourage sales.
- Offer dead stock items as complimentary gifts to shoppers.
- Run targeted marketing campaigns aimed at customers who have purchased similar products.
- Organize clearance sales and special promotions to move dead stock quickly.
Once a business has successfully dealt with dead stock, it can modernize its inventory planning to prevent such circumstances in the future.
- Solidify sales forecasting
Knowing the meaning of dead stock can help the sales teams to create accurate forecasts. They can follow a proactive approach after studying the historical data – including shortages of stocks or sudden spikes in market demands.
Many businesses in the retail industry are still using the traditional spreadsheet system of sales forecasting. They need to realize that when stock volume goes beyond the forecasting system, there could be overstocks, inventory mismanagement, and dead stocks. For improved accuracy, ensure that the forecasting method considers the following factors:
- Historical sales performance of products.
- Market research and trends in consumer behavior.
- Sales history of competing products.
- Predicted sales patterns for new products.
- Outlier factors, such as promotions, weather impacts, and other anomalies.
When the inventory forecast is unique for each product, the business can unify its team on the same page. Together, they can work to have better inventory control at all levels of their business.
- Work on demand forecasting
Having a clear idea of how many products consumers will demand in each season can solve many business problems. Steps like supply chain management and cashflow segmentation could become a whole lot easier. Note that off-the-shelf demand forecasting solutions couldn’t give you the exact picture of upcoming demands.
To have a healthy inventory for existing and new products, businesses should find planning and forecasting solutions that offer:
- AI-powered forecasting to identify and predict key demand patterns.
- A customizable dashboard that provides the data you need, exactly when you need it.
- Real-time adjustments to optimize delivery speed or modify advertising for specific products.
- Tools to proactively plan reorder points and automate purchase orders.
Anyway, let’s face it – most demand forecasting solutions don’t give 100% accurate outcomes. Look for a customized tool or a program that prevents stockouts and garbs more sales.
Final thoughts
Dead stock eats away the profits and holds back the business growth, but preventing it is simpler than you think. Knowing the causes of dead stock and how it impacts business’s bottom line can help them make informed decisions. It’s recommended that companies allocate a team or owners to get structured information on how to prevent dead stocks from accumulating right from the beginning.
