What is dead stock?
There will be times when your business is left with inventory that probably isn’t going to be sold, otherwise known as dead stock. This stock takes up space on your shelves, that could be used for better selling products, and can negatively affect your bottom line.
Dead stock can also include faulty or damaged items, leftover products from promotional seasonal campaigns or expired perishable items. It does does not include customer returns.
Of course, dead stock doesn’t manifest overnight. There is a process whereby stock gradually becomes dead. Items will go from slow-moving to unwanted. Your accounts should show any stock that hasn’t sold within a year as dead stock. In the worst-case scenario, dead stock can equal lost money, which is something that every seller needs to avoid.
What is the difference between dead stock and deadstock?
It’s not surprising that the terms ‘dead stock’ and ‘deadstock’ are confused. This article has explained clearly what ‘dead stock’ is. As for ‘deadstock’, this is a specific term used by some buyers, specifically sneaker enthusiasts.
To them, deadstock is referring to discontinued lines of unworn sneakers or even vintage clothing or fabric that is no longer available in the marketplace and which has the original tags intact. Deadstock items – unlike dead stock – often command a much higher selling price and are much sought after by collectors.
The cost of having dead stock on your shelves
In addition to all of the problems listed above, having dead stock in your warehouse also results in lost revenue. In simple terms, if you have 100 units in stock, each with a value of $100, then you are potentially going to lose $10,000 in sales.
Of course, there are other costs associated with having dead stock on your shelves. The problem is that it’s hard to determine precisely how much should be associated with dead stock. However, these costs could include:
Additional warehousing costs
When you store dead stock, warehousing costs are made up of storage space, staffing and insurance.
Loss of profit
Dead stock never sells at full price, so it automatically results in loss of profit. Simultaneously, you cannot use the money tied up in dead stock to acquire new items.
Similarly, these products will be taking up space that could have been given to better selling items. Costing you possible profits.
Additional employee wages
The more dead stock you have on shelves, the more you need to do to manage your inventory. In the worst-case scenario, staff will need to get involved in disposing of the dead stock.
Another, sometimes hidden, factor is the time it will take you and your business to figure out how to move this stock. This could involve marketing pushes or sales or just the logistics of physically dealing with the issue.
The common causes of dead stock
Forecasting inaccuracies and bad data
Whilst manual forecasting techniques can be fraught with inaccuracies, using specialist software can help avoid major issues. But even sophisticated systems can only work well based upon the data fed into them.
Inaccurate data, circumstances beyond the control of the company and unrealistic expectations can all result in flawed figures with the knock-on effect of overstocking.
To avoid this happening, you need to improve forecasting accuracy by inputting as much reliable data as you can. This might pertain to economic conditions, competitor activities and market trends. For those who have invested in inventory management software, machine learning will come into play, identifying crucial patterns that improve forecasting. You can learn more about Veeqo’s forecasting features here
Have you ever purchased items at the wrong time or ordered too many of one item? This can be avoided by tracking inventory management KPIs, keeping ordering on track and topping up stock at the right times. These KPIs include:
- Inventory turnover ratio: this helps measure how long it takes for inventory to sell and be replaced over a set period.
- Reorder point formula: this refers to the minimum quantity in stock before an item is reordered. If doing this manually, multiply the product’s average daily use rate by the order lead-time.
Excessive SKU ordering
It’s frustrating if you find yourself frequently ordering too many or too few of a certain product. Finding precisely the right balance can be problematic. Some e-commerce fulfillment stores make the mistake of over-ordering so that they never disappoint a customer. Others broaden the range for the same reason.
However, always remember that the more products you order, the more you need to manage (and sell). Getting this right can’t always be guaranteed, particularly if the business is growing fast, but it can be managed. You can prevent this by routinely analysing your top performers and those which are slow to sell (do this manually or via inventory management software). As soon as the slow sellers are pinpointed, hold back on reordering. This will help avoid a dead stock scenario.
There are numerous reasons for poor sales. Take a realistic look at the product. Is the price too high; is it out of style, less appealing than it was or simply the wrong colour or size? Maybe competitors have hit the market with an improved version. Having worked out the reason for the disappointing sales, learn from the experience so that in future, you are more in tune with customers and market conditions.
Demand drop off
No matter how effective your forecasting, sudden changes in the market can cause unpredictable changes in demand. When there is a drop off in the number of sales of a certain product, you may find yourself on the brink of a dead stock situation.
Lessen the effect by managing your inventory carefully, avoiding over-ordering and being ready to put into place contingency plans should demand dramatically and suddenly reduce. The more agile your supply chain, the faster you can react. As an aid, some stores make use of supply chain visibility (SCV). This provides the ability to track components, sub-assemblies and finished products individually on their journey from the supplier.
Should your supplier deliver faulty products that are unsaleable, you immediately have a dead stock scenario. By the time these are returned and replaced, you will have already lost sales. Avoid this occurrence by setting strict acceptable quality limits (AQL) and packaging specifications. If buying large items, such as furniture, it’s ideal to have someone on the ground with the supplier to check goods before despatch.
Poor product specifications
Make it a part of your process that goods are examined upon arrival. If they fail to match the required specification, return to the supplier immediately. Never take the risk of selling items that don’t conform to your usual standards as this puts your reputation at risk. By setting acceptable quality limits (AQL), it’s easy to determine when products don’t live up to desired standards. This is normally shown as a ratio, based upon the total number of items supplied. Anything above this is unacceptable.
If buyers aren’t interested, the result is dead stock. Avoid this by carrying out detailed market research, communicating with customers and looking at what competitors are doing. This way you are more likely to invest in popular products. If you notice that sales of existing products are starting to slow, look at selling at a discount before they become dead stock.
How to move dead stock
Unfortunately, dead stock is an unpleasant fact if you have a retail outlet or an e-commerce fulfillment centre. Nearly all businesses are going to come across it at some time. For this reason, it is wise to know how to move dead stock so that potential losses are minimized.
Give the item away as a free gift
Consider disposing of dead stock by giving it away as a gift, maybe when customers buy something else. Whilst this won’t make any money, it will free up valuable storage space. It may also encourage more sales due to those customers who like to get something for free. Research has shown that when customers receive something for zero monetary outlay, they are more likely to return to the store. Minimize your losses by only giving the free gift when customers spend above a certain amount i.e. $50.
Bundle together products
Another good way of disposing of dead stock is to bundle it together with items that sell well at a price that will attract buyers. You need to show that buyers are making a saving and getting a great deal. You may have heard this referred to as ‘kitting’ i.e. when items are put together. Because you are selling at a lower price, your profit margins won’t be so good.
However, you will be making sales and moving dead stock, which is a good result. Make sure that products look as if they should be together as if the pairing looks forced, buyers may be put off. You can learn more about the advantages of product bundling here.
Return to supplier
This will of course depend upon when they were purchased and the terms and conditions of sale with the supplier. Even if they give only a partial refund, you will be making up for some losses (this will of course involve you paying restocking and shipping fees). If they provide a credit note rather than a monetary refund, you need to be sure that you will be purchasing from the same supplier again.
Have a sale or give discounts
everyone loves a sale and if you make it time-limited, it will attract buyers. Your profit margin may be reduced but cash flow will free up and warehouse space released. Be sure to promote the sale extensively using social media, website and emails etc.
Give to charity
Donating dead stock to charity won’t increase revenue but it is a great PR generator. You may be able to claim tax deductions and your brand image will be elevated in the eyes of customers. More and more consumers nowadays are attracted to stores that care about CSR (corporate social responsibility). Research has shown that 81% of millennials fully expect businesses to “make a public commitment to good corporate citizenship”.
How to avoid having dead stock in the future?
Of course, it’s essential to know how to get rid of dead stock but even more important is the ability to avoid it building up to begin with. This can be done by improving quality control, research into customer needs and inventory management (such as with specialist software). Let’s look at these elements individually:
Use inventory management software
Using physical means to perform inventory control and management is flawed. This is because business owners are using inaccurate and sometimes out-of-date information. A perpetual inventory management system can help avoid dead stock situations by tracking inventory levels in real-time and providing accurate forecasts that enable management to purchase wisely.
The software provides continual monitoring of each SKU (stock keeping unit), making visible the rates at which items are selling and which are slowing down. Management is then enabled to make proactive decisions, phasing out items before they become dead stock.
Test the water
E-commerce could try purchasing small amounts of new products to see how buyers react. Only when reactions are sure to be positive would orders then be increased and large scale production efforts made. During the trial period, check out customer feedback and ask for reviews from buyers. This way you can glean precisely what the customers like or dislike about the item and make changes to improve or discard.
Focus on quality
Sloppy quality checks or poorly manufactured products can result in dead stock. Once customers discover that the quality is below par, they will stop buying and as word spreads, others will follow. Before ordering large amounts or starting mass production, quality control processes should be rigorously established. Only this way can you be sure that raw materials are of perfect quality and that manufacturing is of a high standard with every attention to detail.
Watch your system as it flags up products that are not selling well. A modern inventory management system does the hard work on your behalf, highlighting products that may be falling by the wayside. With this information in mind, establish ways of getting rid of these poor sellers before they become dead stock items. You should take the time to find out why the product failed so that the same situation can be avoided in the future.
Communicate with your customers
This is the secret to knowing what your customers want, enabling you to buy wisely and avoid dead stock scenarios. Use social media to interact, take customer surveys and run market research projects. The more information you gather from customers, the more accurate your buying decisions will become. The valuable information garnered from this activity should alert you to any issues that may manifest as dead stock issues going forward i.e. drop off in product quality or decrease in demand.
We hope this has given you an understanding of what dead stock is, how to avoid it and what you can do to move it. If you want to learn more about inventory management, we have a range of related guides you may be interested in: