When it comes to inventory management, knowing exactly how much to order requires a mix of predictive data analysis, business experience and customer insight. But even the most clairvoyant operations are likely to overorder or overproduce from time to time, leaving the company with inventory that can’t be sold — otherwise known as dead stock.
Dead stock impacts revenue and cash flow, takes up valuable warehouse space and may even threaten a business’s viability. Here’s how to reduce the risk of accumulating dead stock and smart ways to manage or repurpose excess stock that’s already in your warehouse.
What Is Dead Stock?
Dead stock, also known as dead inventory or obsolete inventory, refers to items that aren’t expected to sell. Dead stock can negatively affect a business’s bottom line.
Don’t confuse “dead stock” with “deadstock,” a niche term used by some consumers, such as sneaker enthusiasts. Deadstock usually refers to discontinued lines of unworn sneakers, or vintage items like clothing and fabric that are no longer available on the market but still have their original tags. Unlike dead stock, deadstock items often sell at a premium price.
- Dead stock can be a major expense that reduces profitability by stalling revenue, increasing carrying costs and taking up valuable warehouse space.
- Businesses can accumulate dead stock for many reasons, including poor inventory management, falling customer demand and changing economic conditions.
- Strategies to manage or repurpose dead stock include discounting, bundling and using alternative sales channels.
- Inventory management software can help businesses prevent dead stock by better matching inventory levels to demand.
Dead Stock Explained
Dead stock is inventory that is unsellable. A business may find itself with dead stock because it ordered or manufactured too many items and then found they didn’t sell as anticipated. Dead stock can also include damaged items, incorrect deliveries, leftover seasonal products or expired raw materials. Perishable items, like food or medicine, can quickly become dead stock because they usually must be discarded after a specific time. However, the definition of dead stock doesn’t include merchandise returned by customers.
But products usually aren’t deemed unsellable overnight, so at what point does stock become dead? It’s often a lengthy process. First, items might be considered slow-moving inventory. If they remain unsold, they become excess inventory and eventually are categorized as dead stock. For accounting purposes, any inventory that doesn’t turn over after a year is typically considered dead stock and becomes a liability.
Why Is Dead Stock Bad for Business?
Dead stock is bad for business because it’s expensive. It ties up capital, impacts revenue, increases carrying costs and takes up valuable warehouse or shelf space.
For example, dead stock can lead to:
- Lost money. The biggest reason dead stock is bad for business is because it results in lost money. Companies recoup their investments in inventory only when they sell products. With dead stock, that investment is lost.
- Increased holding costs. Also known as inventory carrying costs, these are the expenses associated with storing inventory. Carrying costs typically include storage space, labor and insurance. The more cash a company has tied up in inventory, the less it has available for other priorities.
- Increased employee wages. The more stock on the shelves, the more effort is required to manage inventory. Between reshuffling and counting items and, ultimately, disposal, dead stock can mean higher staffing costs — for items that ultimately won’t bring in revenue.
- Lost opportunity to break even or generate profit. Even if you manage to sell dead stock, it’s likely to be at a loss. Plus, the more time spent dealing with unsellable products, the more you spend on labor and the less time you have to focus on profitable items.
- Less inventory space. Dead stock takes up valuable shelf and warehouse space that could otherwise be used for faster-selling products.
Cost of Dead Stock
The most obvious cost of dead stock is lost revenue. For example, if a business can’t sell 200 units of a product, each with a $100 retail price, the company theoretically will lose $20,000 in anticipated revenue.
Other costs can be significant but harder to quantify. A company’s total carrying costs can tie up much as 20% to 30% of its capital at any given time, but it may be difficult to determine how much of that is due to dead stock. The longer an item is stored before selling it, the higher the item’s carrying costs become, so dead stock is the worst possible scenario for carrying costs.
Because dead stock monopolizes shelf space, there can also be an opportunity cost. Resources tied up in dead inventory are not available to invest in inventory that could bring in more profits.
As a real-world example, consider that inventory typically represents 35% of a restaurant’s expenses, but some waste up to 10% of the money they spend on food — you could say a bin of wilted produce is the epitome of dead stock.
What Causes Dead Stock? And How to Avoid?
While poor inventory management practices often lead to dead stock, it’s important to note that any business can find itself with shelves of unwanted goods. It’s not always possible to predict trends in demand, and unexpected economic factors can take a toll on consumer spending.
Here are seven common reasons companies end up with dead stock:
Inaccurate forecasting. Forecasting can’t always be perfect. Flawed data, unrealistic expectations or factors beyond the company’s control can cause inaccurate forecasting, where businesses incorrectly predict demand and order too much inventory. It happens to all retailers from time to time.
How to avoid: Companies can use a variety of strategies to improve forecasting accuracy, including analyzing order history to get a better idea of demand, incorporating data about economic conditions and tracking competitors’ activities. Inventory management software that uses machine learning to identify patterns in data can help improve forecasting.
Inconsistent ordering practices. Whether buying items at the wrong time — when demand is low — or ordering too many at once, a company can find itself stuck with excess inventory.
How to avoid: One way to avoid the problem of inconsistent purchasing is by regularly tracking any of the 30-plus inventory management KPIs that are relevant to your business, to help ensure the company orders the right amount to replenish inventory at the right time. Important KPIs include:
- Inventory turnover ratio: This KPI measures how long it takes to sell inventory and is calculated as the number of times inventory is sold and replaced over a given period.
- Reorder point formula: The reorder point is an item’s minimum inventory quantity before it must be ordered. It’s calculated by multiplying the item’s average daily use rate by the order lead time and adding any required safety stock.
Excessive SKU count. Finding the right balance between too many and two few product offerings can be a challenge. Stocking a wide variety of products may seem like a good way to widen your customer base, but the more SKUs you offer, the more you have to manage — and the more you have to sell.
How to avoid: Excessive SKU count can be a natural result of a business’s growth and the process of figuring out its customer base, so it can’t always be prevented. But it can be managed. Routinely analyze your SKUs to identify which are top performers and which are underperforming. The sooner you can spot slow-moving items, the sooner you can spare yourself the cost and trouble of housing excess inventory while minimizing the SKU’s potential fate as dead stock.
Poor sales. A product may not sell for several reasons — its price may be too high, it may be out of style, it may be less appealing than a competing product or it may not match the target market’s needs.
How to avoid: The first step is to determine the cause of poor sales. You may need to become better attuned to your customers, adjust pricing or revise inventory management strategies.
Drop in demand. Even if your company has solid forecasting capabilities, changing market conditions can lead to sudden, unpredictable drops in demand, leaving the company with inventory it can’t turn over.
How to avoid: It’s not easy to be prepared for factors that are outside your control. You can mitigate the impact by maintaining efficient inventory management practices that reduce over-ordering and preparing contingency plans in case demand falls. The nimbler your supply chain, the more quickly you can adjust. Some companies have launched supply chain visibility (SCV) projects to make sure they can adjust quickly.
Quality issues. Defective or subpar products can leave you with items that customers simply won’t buy.
How to avoid: Set rigorous standards for raw materials and products before they enter your warehouse and during manufacturing. Focus on product specs, packaging requirements and setting acceptable quality limit (AQL) standards.
- Product specifications: Examine items when you receive them. If any item received doesn’t match specification, get it replaced — don’t risk trying to sell bad products.
- AQL: Acceptable quality limit, also known as acceptance quality level, is usually expressed as a ratio of the number of defective items over the total items sampled. AQL is used to determine at what point a product or raw material doesn’t meet quality standards.
Lack of customer interest. If customers aren’t interested in what you’re selling, there’s a good chance you’ll end up with dead stock.
How to avoid: Better market research, including talking directly to customers, can help you become attuned to customer desires and needs before making product investments. If an existing product is selling slowly and risks becoming dead stock, try offering it at a discount.
8 Tips to Effectively Manage or Repurpose Dead Stock
Dead stock is a common enough problem that nearly all businesses experience it from time to time. Fortunately, there are ways to minimize potential losses. Here are some of them:
Give a free gift with purchase: You can get rid of dead stock by giving it away when customers buy another item, though this tactic may not help your business’s bottom line except by freeing up space that you can use for other inventory. Still, it might inspire customers to make a purchase because they will be getting more value out of their orders. And, studies have shown that after receiving a free gift with purchase, customers may be more likely to shop at the same retailer again.
To minimize losses, consider offering a free gift only when customers exceed a minimum purchase limit, such as $100 or more.
Bundle products: You may be able to offload dead stock by bundling it with another, related item and selling the bundle at a price that’s less than what customers would pay for the items separately. This approach is also known as “kitting.” Like all tactics to offload dead stock, your profit margins will likely take a hit. To recover as much revenue as possible, it’s best to bundle dead stock with highly popular items that are likely to sell anyway.
Avoid mismatching products: If customers feel like they’re being forced to purchase items they don’t want or need, they’ll be less likely to find value in the bundle.
Partnerships: If you have a positive existing relationship with another company, think about ways you might be able to shift dead stock by partnering to offer a co-branded product bundle, or sending that stock as a free gift with purchase from the company you partnered with.
Another option is to co-sponsor a closeout sale or factory sale where all dead stock is sold at a low price for a limited time only.
Return goods to the supplier: You may be able to return excess raw materials or non-perishable retail items to their suppliers. Even if a supplier doesn’t offer a full refund, it may purchase the dead stock at a percentage of the original price, allowing you to recoup some losses, or it might provide you with a credit. If the supplier offers a credit in return, be sure you’ll be willing to purchase from the supplier again.
Note that you may have to pay for shipping and restocking fees.
Offer discounts or have a clearance sale: Discounts and clearance sales may be the most straightforward way of dealing with dead stock. Even if you don’t get the profit margin you originally hoped for, selling dead stock at a discount can help you get cash flowing while freeing up space. Advertise big savings to customers; they may be more encouraged to buy. Clearance sales can be especially effective if your dead stock is full of seasonal — yet still useful — items.
Take advantage of wholesale sellers: If you can’t sell dead stock to your customers, you may be able to sell it to another company that will resell it at discounted bulk pricing. There are several options:
- Wholesalers buy goods from manufacturers at a lower price and then sell them to retailers for a higher price. The retailers then sell items to consumers.
- Closeout wholesalers focus on turning over end-of-life-cycle products.
- Liquidation companies exist to resell excess stock. They usually buy dead stock at a very low price, so you might not break even — but at least you can free up shelf space for more profitable items.
Try a different sales channel: If your standard sales methods aren’t working, consider selling products in an online marketplace, such as eBay. Sites like these typically already have audiences, so you may be able to tap into new customers who haven’t previously heard of your company or seen your products. You may have to put in some effort to manage your products on online marketplaces, but the sites’ search functions can make it easy for consumers to find your items.
Note that you may have to pay to sell via online marketplaces, either through sales cuts or monthly fees, so it’s a good idea to thoroughly read the terms and conditions in advance.
- Donate dead stock: While donating dead stock to a good cause won’t help you recoup lost revenue, you may qualify for tax deductions and make a good impression on customers. More and more consumers — especially younger consumers — care about corporate social responsibility when making purchasing decisions. One study found that 81% of millennials expect companies to “make a public commitment to good corporate citizenship.”
5 Ways to Avoid Dead Stock
While it’s important to know how to get rid of dead stock when necessary, it’s even better to avoid having dead stock in the first place. Better inventory management, quality control and research into customer needs can help.
Here are some specific measures companies can take:
Invest in inventory management software: Companies that perform inventory control and management manually usually have limited visibility into inventory levels because they rely on periodic physical inventory checks and lack a continuous flow of up-to-date information.
Inventory management software can help companies avoid dead stock by tracking inventory levels in real time and forecasting demand to make informed decisions about how much inventory to purchase. You can monitor the performance of all your SKUs so you can see which items are selling and which aren’t and take steps to increase sales or phase out items at risk of becoming dead stock.
- Test products before mass producing: Making small batches of products and seeing how customers react before committing to larger-scale production may be more expensive upfront, but the advantage is that you hedge the risk of ordering or manufacturing a large number of units that don’t sell. Meanwhile, you can get customer feedback and possibly discover changes you can make to improve the product and boost its chances of success.
- Ensure products are high-quality: Quality issues are a common cause of dead stock. If customers are not satisfied with your products, they’ll stop buying. Before mass manufacturing or ordering in bulk, establish rigorous quality assurance processes to ensure there are no defects in the raw materials you use and the products you ship to customers. Every component should be of adequate quality to meet customer needs.
- Monitor slow-moving products: Keep an eye on slow-moving SKUs — they may become dead stock in the future. To do so, you’ll need a modern inventory management system that tells you which items are languishing. Once you identify lagging SKUs, be proactive about getting rid of slow-moving stock before it further damages your cash flow. And, attempt to identify the cause and a potential remedy for the future. You may need to offer promotions or discounts, phase out the product or revamp the item.
- Survey customer needs: If you know what customers want, you’ll be better positioned to avoid dead stock in the first place. Send out customer surveys, and conduct market research before investing in new products. And, continue gathering customer feedback after you start selling those products — the results may alert you to potential issues that could lead to future dead stock problems, such as changing requirements or a drop in product quality.
Eliminating Dead Stock with Inventory Management Software
Inventory management software can help eliminate dead stock by continuously monitoring and managing inventory levels to ensure you have just enough inventory to meet demand.
Advanced inventory management software can improve forecasting capabilities by using machine learning to analyze usage and demand, while automatically calculating the optimal time to replenish inventory items. This helps companies avoid holding excess stock that could end up sitting on shelves indefinitely. Leading software solutions support inventory tracking across multiple locations and enable businesses to trace items through their entire lifecycles to track product quality issues.
Bottom line, avoiding dead stock can be challenging for businesses of any size. Companies can be left with dead stock for many reasons, from inconsistent ordering practices to economic downturns and quality issues. However, businesses can take steps to minimize the risk of dead stock by using inventory management software, monitoring customer demand and applying rigorous product-quality standards.
Q: What does the term “dead stock” mean?
A: Dead stock is inventory that a company has held for a long time and is unlikely to sell. To get rid of dead stock, companies may employ strategies such as offering discounts or bundling dead stock with better-selling products.
Dead stock shouldn’t be confused with “deadstock,” a niche term that’s applied to some consumer items, such as discontinued lines of sneakers and apparel, that are often highly coveted and sold at a premium price.
Q: Does deadstock mean an item is authentic?
A: The term deadstock, as applied to consumer goods, means the item being sold is authentic. Deadstock goods must be brand new, never worn and usually include the original tags.
Q: What is deadstock fabric?
A: Deadstock fabric is past-season fabric that went unsold, usually because it was surplus, unwanted by the designer, slightly damaged or of subpar quality. Some fashion companies may source deadstock fabric to save money or prevent fabrics from being thrown away.