If one of your products has been sitting on the shelf for a while, it may be what’s referred to as dead stock. Dead stock is any inventory that hasn’t sold in the expected time and is unlikely to sell in the future.
Unfortunately, any business that sells physical products is likely to end up with dead stock at some point. And without any inventory management system in place, dead stock can take up valuable space in your warehouse and lead to financial loss.
What is dead stock?
Dead stock (also referred to dead inventory or excess inventory) is any product that hasn’t sold within a certain period and is no longer expected to sell.
Examples of dead stock include seasonal items, defective goods, or products that have become obsolete. Of course, dead stock can also be products that simply don’t have any customer demand in the first place.
Dead stock doesn’t include products that have been purchased and later returned by customers—only products that haven’t sold.
Businesses that sell physical products, like manufacturers or retailers, run the risk of dealing with excess inventory. While a few unsold items are natural when doing business, large quantities of dead stock can disrupt your supply chain.
Ideally, a supply chain moves a product from the manufacturer to the customer using the most efficient and cost-effective method. Dead stock, however, is inventory that hasn’t generated its expected profit. Excess inventory often costs a business money and takes up space that could be used for newer, more in demand products.
Why your business wants to avoid dead stock
Aside from not being able to generate its expected sales, dead stock negatively affects a business in several ways.
Loss in revenue
The most obvious reason to avoid dead stock is it represents lost revenue. A business invests in inventory as an asset intended to generate profit. But with dead stock, that profit is not realized and instead results in a direct loss of revenue. When a product ends up as dead stock, it won’t yield the projected return on its business investment.
Drain on resources
When figuring out what to do with dead stock, a business may have to move products around its warehouse, cycle count inventory, and reassess its sales projections. In most cases, it means increasing work hours or even hiring more employees to handle the added maintenance.
Increased holding costs
Aside from not generating its expected profit, dead stock incurs additional holding costs or inventory carrying costs.
Every inventory unit requires storage, labor, utilities, and insurance — all of which come at a cost to the business. Usually, holding costs are covered by the sale of the product. But in the case of dead stock inventory, the products remain unsold and unable to cover these costs.
Increased opportunity cost
The more resources spent dealing with dead stock; the less is available for more profitable products.
For example, dead stock takes up valuable space that could be used for other inventory. A business may be unable to purchase more of its best-sellers and lose sales simply because it doesn’t have the available cash flow and valuable warehouse space. (One way to avoid this is using an ABC inventory analysis.)
Even if a business eventually manages to sell its dead stock, it’s often at a breakeven price or loss.
What are the causes of dead stock?
Unfortunately, having unsold products left on shelves happens reasonably often, and there are several reasons businesses face dead stock. Here are a few of the main culprits.
Even with all the data and tools at our fingertips, forecasts won’t always be 100% correct. There are rapid shifts in trends, new market competitors, and many other factors beyond your control.
An inaccurate forecast may prompt a business to purchase high inventory volumes, which end up as dead stock if the forecast doesn’t pan out. This is especially common for brand new products, with little historical data to draw from, or trendy items with a naturally shorter shelf life.
If your business offers a variety of products, those with similar features or target markets can suffer from cannibalization. The original idea may have been to attract more customers with more products, but that’s not always the case.
Yes, some new customers may come to your business. But a big portion of current customers will also shift to the more popular selling item.
So while there’s sales growth for a particular product, other inventory may be cannibalized, leaving the business with dead stock and only a slight overall increase in market share.
Insufficient demand or sales
There are many reasons why inventory doesn’t sell. The product could be seasonal, outdated, or in competition with other alternatives. It’s also possible the product is sold elsewhere at a lower price.
While a lot of planning goes into purchasing inventory, a business can’t know how a product will or won’t sell.
Lack of an inventory management system
With so many products and SKUs moving in and out of storage, not having a reliable inventory management system can leave businesses at a loss.
You may unintentionally order too much cycle stock, or miss your reorder point, causing backorders. A lack of updated data makes it difficult to tell whether a product is selling slower and likely to end as dead stock.
The cost of dead stock explained
Dead stock are products that started out as assets expected to turn a profit, but are now expenses a business can no longer recoup. Here are the main dead stock inventory costs:
- Cost of the product: The amount spent to purchase or produce the product.
- Cost of storage: The total expenses for storage space, utilities, insurance, and warehouse overhead.
- Cost of maintenance: The added salaries for overtime or new employees needed to maintain and manage the increased inventory.
- Opportunity costs: The potential profits from other products that are lost by holding onto dead stock.
3 ways to prevent holding dead stock inventory
The best way to prevent dead stock is to have an inventory management system in place. While there’s always a possibility a product will have poor sales, the following steps can prevent having dead stock in your inventory:
Keep an eye on market forecasts and trends
The optimal number of products to order is usually based on previous order history, sales data, market trends, and many other factors. Inventory software can help calculate the most accurate estimates for your business, using automated tracking and analytic reports.
Use data to inform your purchasing decisions
With so much available data, it’s become easier to detect any drop in demand or market trends before purchasing a product.
Even once inventory is in the warehouse, monitoring daily sales can indicate whether a product is showing a downtrend in demand.
If there’s not much information, say for a new product or variant, a business is better off starting with a small batch, even at a higher per-unit cost, to reduce its risk of ending up with dead stock.
Automate inventory workflow and purchase orders
Dead stock is a common occurrence when there are misplaced items, miscalculated orders, or generally unorganized inventory,
Rather than trying to keep tabs on everything through manual efforts, inventory management software automatically monitors every product in your warehouse or retail businesses. Notifications can then be scheduled to alert managers when a product is low in stock, or hasn’t been sold within a certain period of time.
Inventory software can also reveal your fast- and slow-moving products in real-time, enabling you to decide on the best reorder quantity, reorder points, or whether a product no longer makes enough sense to stock in inventory.
5 ways to manage dead stock and turn it into sales
Even with the best inventory management, there’s no guarantee a business will never end up with dead stock.
Fortunately, if you find yourself with dead stock on your hands, there are many ways you can turn them into sales.
Put the products on sale
A natural course for businesses is to put dead stock inventory on a clearance sale. If products are seasonal or becoming obsolete, for example, offering them to customers at a discount can help quickly move them off the shelves. Even with promotional pricing, the products can still bring in some profit.
Alternatively, there are closeout liquidators, consignment stores, and other companies that buy dead stock items. It might not always be a viable option (i.e., you want to protect your brand, they don’t accept the particular product), but selling in bulk is an excellent way to liquidate excess stock quickly.
Bundle dead stock with other products
Bundling dead stock with more popular products positions them as an attractive, limited-time promotion. Customers get two or more products for a lower price than buying the products separately.
Offer the product as a free gift
Another way to draw value from dead stock inventory is to offer it as a freebie for customers.
There are a few ways to do this: A business can give a free gift with purchase to encourage a customer to increase their order value. For example, “Get a free gift with every $100 purchase” or “Receive a free giveaway when you buy X item.”
Or, a free gift can be used to incentivize other actions, like answering a customer survey or participating in a referral program.
The advantage of turning excess stock into gifts is it generates goodwill and customer loyalty for your business.
Donate your dead stock inventory
While it doesn’t make up for lost revenue, donating items to charity is part of your corporate social responsibility (CSR). This can end up benefiting your business in other ways, as recent findings indicate businesses with CSR activities “can win consumers, as well as develop a platform to market and earn their audience’s attention.”
Another option is to continue selling the products, with all or a percentage of sales going to charity.
Charitable donations can also qualify as tax write-offs or deductions, and several businesses may opt to form long-term partnerships with a charity.
Return dead stock to the supplier
Returning products to a supplier is a straightforward solution, but one with a minor benefit.
If a supplier does accept returns, it usually won’t provide a full refund and may even require a restocking fee. Your business is also responsible for all shipping costs to send the products back.
Some suppliers offer a credit refund, which is only useful if you plan to continue purchasing their products.
If a return is the best option, make sure to process it as soon as possible and send the products back in their original packaging.
Holding onto dead stock decreases the profit margin and overall performance of a business. Instead of generating the projected sales, the products end up becoming a greater cost to the business.
Thankfully, there are several options for dealing with dead stock. They can be sold at a discount, bundled with other products, donated to charity, and more.
An inventory management system can also help you gauge the likelihood of any products turning into dead stock by providing an overview of all sales data and trends. Being proactive in managing your inventory can lead to more cost-effective operations, accurate forecasts, and an improved bottom line.
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