Dead Stock: What It Is And How To Handle It

 HOW TO HANDLE THE DEAD STOCK

No matter how good you are at inventory management, chances are you’re going to over-order from time to time. And when you do, you’re left with dead stock.

Dead stock is excess stock that you do not expect to sell. In some cases, it can be very easy to quickly recognize dead stock. For instance, if a grocery store has a crate of apples that rot, they can’t expect to sell those — turning those apples into dead stock. 

In other cases, it can be harder to recognize the difference between dead stock and  Slow Moving Inventory. For instance, most clothing items shouldn’t become completely unsellable. In this case, you should consider inventory that remains unsold for a year to be dead stock for accounting purposes.

Why is dead stock a problem?

The most obvious reason that dead stock is an issue is that you lose money when you invest in inventory you then never sell. Whatever you spent on that inventory is now wasted and your bottom line is impacted. 

But there are also costs incurred from having dead stock items taking up valuable warehouse space and using up storage costs. It means you have less Cash flow and literal room to invest in profitable inventory. AND you still have to pay the costs for maintaining the dead stock on your shelves. Ultimately, dead stock means a loss in opportunity cost as well as everything else.

What are the causes of dead stock?

There are a variety of things that lead to dead stock. Identifying them and making sure your business is doing what it can to improve each area will help lower the likelihood that you incur dead stock inventory. 

1. Inaccurate forecasting

Forecasting is a crucial part of inventory management and doing so accurately greatly minimizes the likelihood of excess inventory.

Many businesses, especially new and emerging retailers, forecast incorrectly or even skip forecasting altogether. It is impossible to purchase the right amounts of inventory if you don’t have a clear idea of the demand for your products, and all other relevant business data needed to make an informed decision.” 

To aid accuracy in forecasting, Daniel suggests, “Retailers need to forecast multiple ways. Forecasting should be done at both the total level (called “tops-down planning”) as well as the SKU level (called “bottoms-up planning”). Total level planning often underestimates demand, while SKU level planning often overestimates it. By performing both analyses, you can then compare the results of each forecast, and massage your targets to get to a more realistic place.”

2. Poor ordering practices

No matter how accurate your forecasts are, if you’re not using good ordering practices, you’ll be sunk. For instance, no matter how tempting it is to make a huge purchase of an item that’s currently selling like hotcakes, you need to seriously consider if the demand will still be there when the order hits shelves to avoid over stocking.

3. Poor sales

You may have forecasted accurately and ordered perfectly, but the product may still not sell due to other factors. Price point and marketing play a huge role in a product’s success. If your product is squirreled away in the back of the store, for instance, it’s not likely to sell well no matter what it is.

How to prevent dead stock

It is crucial to use inventory management software. Such software solves many of the problems that lead to dead stock by providing accurate and up-to-date data on your inventory. With this data you can:

·         Quickly identify slow-moving inventory and change up your marketing and sales strategies in real-time

·         Find your dead stock

·         Create accurate forecasts

·         Improve your ordering practices

While an inventory management system is certainly the best way to prevent dead stock, there are some other things you can do.

1. Test small batches of new products before investing deeply. Try running it only in your online store or most trafficked location before restocking with a large order quantity. 

2. Quality test your products. Examine products closely when you receive them and ensure that they’re up to your standards before the hit the shelves. 

3. Improve your tactics for slow-moving products. Inventory management software can only identify your slow-movers – it’s up to you to figure out how to get them going.

How to get rid of dead stock

While getting rid of dead stock isn’t easy, you have some options.

1. Create bundles

Product bundles are a retailer’s secret weapon. They’re effective for achieving all kinds of goals – like raising AOV. They’re particularly good for moving slow or dead stock. By pairing your less-desirable items with fast-movers, you can move the unwanted stock much faster. 

2. Try heavy promotions

With dead stock you know you aren’t going to recoup your losses. So getting it off your shelves as quickly as possible is the way to go. Having a clearance sale and selling it at a huge discount can help get it out of your rotation, even if it means completely losing your profit margin.

This strategy is very commonly employed in the post-holidays for seasonal items. Clothing retailer Talbots runs an annual sale-on-sale promotion on their winter items starting after December 25. They offer an additional percentage off the marked-down price that increases slowly until all clothing items are either gone or relegated to their outlets. The percentage off has gone as high as 80% in early February before final relegation.

In a similar vein, you can simply give the product away. Use it as a free gift with purchase promotion. Using giveaways, your dead stock can be used to motivate full-price purchases.

3. Donate the stock

Neither of those options work for you? You can donate your dead stock instead. The most famous example of dead stock donation is the NFL’s donation after every Super Bowl. They create winning merchandise for both teams leading up to the game and once there’s a winner, the NFL donates all the losing team’s merch since they can’t sell it.

Wrapping up

Every retailer will face dead stock at some point or another, that’s a given. What you can do is utilize the data at your fingertips to minimize the likelihood and have strategies ready to deploy when it does eventually happen.