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 an expected time and is unlikely to sell in the future.
Unfortunately, any business that sells physical products will likely end up with dead stock at some point. And with a way to manage inventory effectively, dead stock can take up valuable warehouse space and lead to financial loss.
What is dead stock?
Dead stock is any product that has yet to sell 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 levels often cost a business money and take up space that could be used for newer, more in-demand products.
Why your business should avoid dead stock
Aside from not generating 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, perform a cycle count, or reassess its sales forecast. It usually means increasing work hours or hiring more employees to handle the added maintenance.
Increased holding costs
Aside from not generating its expected profit, dead stock incurs additional storage 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 carrying costs remain.
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 or 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 inventory left on shelves happens reasonably often, and there are several reasons businesses have dead stock. Here are a few of the main culprits.
Inaccurate forecasting
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.
Market cannibalization
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 portion of current customers will also shift to the more popular selling item.
So while sales grow for a particular product, other inventory may be cannibalized, leaving the business with dead stock and only a slight overall increase in market share.
Ineffective inventory management
With so many products and SKUs on the move, inaccurate inventory tracking 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.
QuickBooks Enterprise enables businesses to manage sales orders and track inventory across multiple warehouses in real-time, down to the bin or pallet. With the visibility to see which products are most profitable, businesses can pivot quickly to reduce the odds of being stuck with dead stock.
3 Ways to prevent holding dead stock inventory
While increasing the effectiveness of your inventory control is a good place to start, there are other more granular steps a business can take to prevent having dead stock inventory sitting in a warehouse.
Continuously market forecasts and trends
The optimal order quantity is usually based on previous order history, sales data, market trends, or metrics like inventory turnover. Inventory software can help calculate the most accurate estimates for your business, using automated tracking and insightful reporting.
Use real-time data to inform your purchasing decisions
With actionable data, it can be easier to detect demand changes or market trends when making manufacturing or purchasing decisions
With a new product or SKU, there isn’t previous sales data to forecast demand on, so leaning more conservatively, even at a higher per-unit cost, can reduce the risk of ending up with dead stock.
Automate inventory workflows and purchase orders
Dead stock often occurs when there is misplaced inventory, miscalculated orders, or overly ambitious forecasting.
Rather than trying to keep tabs on inventory operations through other means, business solutions like QuickBooks Enterprise accurately tracks inventory across warehouse and retail locations. Plus, you can delegate accounts payable and purchase order tasks with customizable workflow approvals. Set automated reminders for employees to meet approval deadlines by tracking approved transactions with audit trail.
However, sometimes there’s just no avoiding dead stock. In that case, here’s what you can do to get it off the shelves.
5 Ways to manage dead stock and turn it into sales
If you find yourself with dead stock on your hands, you may not be stuck writing it off as a loss. Here are the best ways to get dead stock off your books.
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. With flexible, automated pricing rules in QuickBooks Enterprise, you can set quantity discounts, as well as scheduled and seasonal promotions to protect your margins and boost sales with price-sensitive customers.
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.
Utilize product bundling
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.
Bundle pricing has the benefit of generating increased interest for a business and saving on shipping and warehouse inventory costs.
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 compensate for lost revenue, donating items to charity can be a way to reduce dead stock while contributing to corporate responsibility.
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 that has drawbacks..
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 return the products. 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 the same condition as you received them.
Final thoughts
Holding onto dead stock can cut into the profit margins and overall performance of a business. Instead of generating the projected sales, the products sit in the warehouse and accrue costs to the business.
Thankfully, there are several worthwhile options for dealing with dead stock. They can be sold at a discount, bundled with other products, donated to charity, and more.
With an all-in-one business solution like QuickBooks Enterprise companies can stay ahead of the game with actionable insights that produce better purchasing decisions. Effective inventory management systems can help a business gauge the likelihood of products turning into dead stock by providing real-time data and customizable reporting. Being proactive with inventory operations can lead to more cost-effective operations, accurate forecasts, and an improved bottom line.
