What is Dead Stock?
Part of the inventory management process is determining what is dead stock and how to minimize it. Dead stock inventory is inventory that can’t be moved, either because it became obsolete, expired or demand diminished. It is extra inventory that goes above and beyond the amount you would choose to keep on hand for safety stock. Some industries face a bigger problem with deadstock inventory eating into their profits; it’s prudent to look for ways to reduce or avoid it.
What does deadstock mean for your business?
If you can’t unload excess inventory, dead stock can cost your business money several ways:
- Inventory you can’t move takes up room on your shelves, costing you dollars in storage fees.
- Most of the time, dead stock results in lost profits. But if you must discard goods because they are no longer good to sell (expired), then you can also lose on your initial inventory investment.
What should you do with dead stock?
The way to alleviate the problem will depend on what kind of dead stock you have. For example, if your deadstock item is a spoiled gallon of milk, you have no choice but to throw it away. Dead stock inventory management depends on your industry and nature of your products.
- Expired goods – these types of products may be food items, chemical, pharmaceuticals, or cosmetics. Since they must be consumed before the expiration date, when they are still on your shelves after said expiration date, they are no longer saleable. The best way to handle this type of deadstock is to work to prevent it. One effective way to reduce perishable dead stock inventory is to track it with lot tracking capabilities, easily handled with SOS Inventory software. Lot tracking allows you to log each material by expiration date and locate it wherever it may be in its life cycle so you can ensure you are always moving first in first out to deliver fresh items to your customers.
- Obsolete inventory – if you’re in the furniture or clothing business, your inventory is passe within a few short months. Although it doesn’t spoil, once the fashions change, you won’t be able to get full price for your inventory. Your best bet is to offer it at a discount or offload it to a discount warehouse at a lower price. The longer this inventory is retained, the more it decreases in value; therefore, unloading it at a discount rate will bring in more money than holding on to it.
- Overages – perhaps you just have more inventory than you can move and it’s taking up space in your warehouse. One way to move it is to offer a volume discount to your distributors and wholesalers.
When Should You Label Dead Stock as Dead Stock?
There are several factors that companies should consider when determining at what point stock becomes dead stock. These include:
1. Sales Velocity
One of the most important factors to consider when determining dead stock is sales velocity. Sales velocity refers to the rate at which a product is selling. Products with a high sales velocity are those that are selling quickly and consistently, while products with a low sales velocity are those that are selling slowly or inconsistently.
To determine sales velocity, companies should track sales data over time and analyze trends in sales volume. If a product’s sales velocity is consistently low over an extended period of time, it may be an indication that the product has become dead stock.
2. Seasonality
Another factor to consider when determining dead stock is seasonality. Some products may be popular only during certain times of the year, such as holiday-themed items or seasonal clothing. If a product is not selling during its peak season, it may be an indication that it has become dead stock.
3. Shelf Life
Products that have a limited shelf life, such as perishable goods or products with expiration dates, should be closely monitored to ensure that they are not becoming dead stock. Once these products reach their expiration date or go bad, they can no longer be sold and become a loss for the business.
4. Trends and Consumer Preferences
Consumer preferences and trends can change quickly, and businesses need to stay on top of these changes to ensure that their inventory is up-to-date. Products that were once popular may become outdated or less desirable over time, and businesses should be prepared to adapt to these changes.
5. Sales and Marketing Efforts
Finally, businesses should consider their sales and marketing efforts when determining at what point stock becomes dead stock. If a product is not selling, it may be an indication that the product is not being promoted effectively or that there are issues with the pricing or packaging.
Even smart inventory planning can sometimes go awry. If forecasts indicate demand for a specific quantity of goods, but then demand drops for some reason, i.e., economic or health disasters change the course of consumer buying habits, you could end up with more inventory than you are able to sell.
We live in extraordinary times when something unexpected lurks just around the corner. While you can’t control the circumstances outside your business, you can do your due diligence to optimize your business to reduce waste and profit loss.
If demand slows down, you may need to adjust your purchase order behavior to adapt. Reorder points should be periodically recalculated to keep ordering in check with consumer demand.
What is dead stock doing in your inventory if not eating up your profits? You can, indeed, get it under better control by managing your inventory with SOS Inventory. With SOS Inventory, you will always know how much inventory you have on hand in all stages of production. You can run product reports to find out a wide variety of details about performance at any stage of the game.
Being proactive in managing your inventory will help to reduce dead stock and keep more money in your pockets.
