What is Dead Stock? – Inventory Management Analysis
What is Dead Stock?
Inventory control is probably one of the trickiest aspects of running any business. If you’re understocked, you can’t make sales and customers will be inconvenienced. On the other hand, if you overdo it, you might have too much money tied up in your inventory. This also creates a potentially big problem in the form of dead stock. If you don’t get it under control, this can eat up your profits.
So what is dead stock, and how can you prevent it?
What does dead stock mean?
It’s easy to define dead stock, because everything you need to know is in the name. It refers to products in your inventory that don’t move or sell as fast as you’d like. Sometimes they don’t even sell at all and sit forever on your warehouse shelf. In other words, it’s stock that’s already dead.
This type of stock is a common but undesirable part of any business with a supply chain. That’s because it represents a portion of your company’s expenses that you can’t convert to profit. Remember, all products in your inventory are assets. That means you spent a portion of your capital to procure them. If you can’t sell them, then your company effectively wasted money on them.
Why it’s a problem
That’s just the beginning. You might not think they’re doing much harm to your business just by sitting there, but they’re taking up valuable warehouse real estate for zero returns. That space might have been better occupied by a faster-moving item that would’ve given your business revenue.
You must also remember that you have storage costs to consider with dead stock, meaning you’ll need to spend money to keep them in your warehouse. This is usually in the form of rent, utilities, and equipment. For typical stock, this is acceptable because you can recoup the costs once you sell the product. With dead stock, this doesn’t happen, so you end up burning cash.
To toss, or not to toss?
This problem becomes even more prominent for specific items that have a high cost to store, such as refrigerated goods. Perishable stock is a ticking time bomb that will become a total loss if it’s not sold. In these cases, it quickly becomes a hole in your balance sheet that can eat up your profits.
It can be a challenge to get rid of these items in your inventory. It’s always a waiting game with dead stock, meaning it’s hard to decide whether to just dispose of it (and accept a total loss) or to wait for an opportunity to sell and recoup your investment.
Causes of dead stock
Multiple factors can cause dead stock, and it isn’t just limited to errors in predicting supply and demand. This can occur in any company, even those who have correctly forecasted their inventory. The market is simply unpredictable.
Here are some of the top causes of dead stock:
A sudden drop in demand
This is the common cause. Sometimes, even with perfect forecasting, a sudden event might cause the demand to drop drastically and lead to stock that you can’t sell.
The recent coronavirus pandemic is the perfect example of this. In an instant, demand changed and left a lot of businesses with stock that they can’t get rid of.
Unfortunately, this is something that affects every business, whether you have a robust inventory control or not. The best way is to just be prepared for the worst.
Of course, dead stock can also be the result of poor inventory forecasting. You might have ordered an excess number of stocks to anticipate the holiday season, but ended up selling only half of that. That’s already dead stock.
Timing is also vital, and you can wind up with dead stock if you miscalculate. If you’re selling Christmas-specific items, for example, re-ordering too late can run the risk of having a lot of excess products that you won’t be able to sell for at least a year.
This is a problem that can be solved with the right dead stock management system. Having proper inventory control and forecasting can help you anticipate stock levels with reasonable accuracy.
If your products are defective or of poor quality, then you’ll have a hard time selling them off. Unfortunately, your options are few and far in between when dealing with subpar items that your market won’t accept. Whatever your approach, it will almost always result in a significant loss.
Poor sales performance
Often, the problem with excess stock lies with poor sales performance. Even if you’re in the right market at the right time, and with the right stock levels, subpar sales and marketing can undo all of that hard work.
For example, if your sales team is not hitting their numbers, then it will create dead stock problems. The wrong marketing approach, such as misaligned marketing campaigns or high cost, can also contribute to overstocking problems.
Best practices for dead inventory management
Sooner or later, most companies will have a dead stock issue in their hands. Fortunately, there are numerous ways on how to effectively manage them. After using dead stock analysis to get a scope of the problem, you can try any of these four strategies:
1. Bundle the product:
This is, by far, one of the most common and effective ways to get rid of dead stock. Also known as kitting, this strategy involves packaging the dead stock item with another faster-moving item.
The idea is to make the offer much more attractive to your customers, so you can get rid of the dead stock in the process. Your profit margin will be lower, but it’s better than getting no revenue from dead stock at all. At best, you’ll break even and get back the cost of that item.
2. Sell at a discount:
If bundling isn’t an option, then you can try the classic strategy of selling at a discount. While typically not a good pricing technique, it can nevertheless help make the dead stock that much more attractive to your market.
When you do this, it’s best to inject some scarcity in your offer. Mentioning a time limit or how limited the stock is can spur your customers into action and drive the sales of your dead stock up.
3. Use it for your marketing efforts:
You can use dead stock items to support any of your marketing campaigns. For example, you can use them as giveaways or incentives in an online contest. You can also give them for free if they buy any of your other regular items. The idea is that it will encourage them to come back and buy again in the future.
It might take a while for the value of your marketing efforts to bear fruit, so you probably won’t see any real benefit from doing this on your balance sheet.
4. Try selling in other locations:
If your business operation involves multiple branches or regions, moving some of the dead stock there might be a good idea. You never know, but these items might be more attractive in a newer market.
Aside from a physical location, you can also explore other virtual avenues as well. If you haven’t yet, try placing your offer on sites like eBay or Amazon. At the very least, you’re tapping into a new demographic that might be more receptive to your dead stock.
How to avoid or reduce dead stock
Dead stock is a problem that must be detected and prevented early on. To make sure you prevent this from happening, here are a few things you can do:
Having a strict QA system in place
Having a robust quality control system in place is vital if you want to avoid any defective products or raw materials from entering your inventory. The key is to implement it consistently.
You should also communicate carefully with your supplier about your product specifications and minimum quality standards. Even the slightest defect should be sent back to your supplier. It might create a delay with your supply chain, but it’s much better than having defective dead stock in your inventory.
Have a sound inventory control system
Dead stock is often the result of forecasts on your inventory. That’s why it’s crucial to have an excellent inventory control system in place. This allows you to accurately predict the number of stocks that you need to order without too many excess stocks. You can use a technique like ABC counting, to replenish high-moving stocks more compared to those with lower demand.
You must also make use of data at your disposal, such as past sales history and stock velocity. Seasonality must also be taken into account, as well as market conditions.
Negotiate to sell back to your supplier
If you’re convincing enough, you can make a deal in your contract stating that you can return items to the supplier if they don’t sell as well. This is a great strategy to employ because you get your money back and don’t need to worry about getting rid of the dead stock yourself.
This is a good safety clause for you, but be prepared to take a small loss in this transaction. Suppliers will often charge you a restocking and shipping fee for returns. Sometimes, they will refund you in-store credits as opposed to cash.
Reduce dead stock with Revel Systems
At the end of the day, dead stock is detrimental to your business success. That’s why you need to manage and avoid it as best you can. The best way is with a robust inventory control system like the one built into Revel’s POS solution. Get in touch with us today to learn more.