What Is Dead Stock

What Is Dead Stock?

By Team TranZact | Published on Feb 28, 2023

The knowledge of what is dead stock is critical to managing cashflow and revenue, keeping up the most valuable warehouse space. Dead stock also has an impact on business viability and seamless stock management. When we talk about inventory management, knowing how much should be ordered depends upon the use of business experience, customer insight, and predictive data analysis. Let's dive deeper to know what is dead stock, its causes, and how to manage it.

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What Is Dead Stock?

A dead stock item is any unsold item that has been lying inside the store or warehouse for a very long time. It can be detrimental to any business. This is because it can take up a lot of valuable space in the warehouse. It can also act upon the company's bad investment.

The amount which is spent on the product or items from the vendor can also be recovered only if they are being sold. If the stock is not selling, it will mean money is lost. Dead stock is quite common, especially in the case of trading businesses. But it can hamper the business if dead stocks are not managed in time. Having understood what is dead stock, let's see what are the causes that lead to dead stock.

Causes of Dead Stock

In the trading business, occurrences of dead stock are quite a common problem. Here are the reasons for the cause of dead stock in a business:

1. Inconsistent ordering

The most obvious and biggest cause for the dead stock is inconsistent ordering. Inconsistent ordering means when a person orders the wrong product or item (that mostly happens in the case of bulk orders) or makes a purchase at the wrong time. There could be multiple reasons for it. One such reason needs to be properly understanding the inventory turnover rate.

Solving this problem isn't easy. Especially when you set the reordering points, set the inventory per level, and learn about the inventory turnover rate. You should understand how to sell the items and what type of inventory level you should maintain to prevent lost sales and stockouts.

Once you start adding the EOQ or Economic Order Quantity calculation, you will know when to re-order the item, and you will get a formula that can be used to know the amount of product or item that has been purchased. An inventory management tool or software will help to eliminate inconsistent orders. It provides a report on the inventory turnover and monitoring of items and allows you to set per level so that you could be able to avoid the issues arising due to dead stock.

The use of simple calculations such as Economic order quantity, inventory turnover ratio, and Reorder point can be used to follow the most effective schedule to order the items from the vendors. Each tool concentrates on order management in different areas.

  • Inventory turnover ratio: It gives an idea about how much time it will take for the item to be turned into a sale. For example, if the inventory turnover ratio is about 10, then approximately 36.5 days will be taken to turn over the inventory. It can be used to decide the future strategy depending on the record of the past year, which can be used to compare the turnover ratio with the standard for the industry.
  • Reorder point formula: It depends upon the usage of material and how many days it will take for the product to reach the warehouse or store when the purchase has been done with the vendor.
  • Economic Order Quantity: Once you know the turnover number and the right time for making a new purchase, the next thing to do is to know how many items you need to order. The EOQ tells about the number of items that you need to order. It provides more security than the reorder point, reducing dead stock and overstocking chances.

2. Poor sales

It is another important factor that can cause dead stock. This is more challenging than ordering consistently. This is because you don't have information about how many items are needed to be sold. Even if you do the best research, you may go wrong. It will leave you with overstocked items that won't go anywhere from the warehouse. Seasonal products and items can also be categorized into either this or the category of inconsistent ordering. So as we know about what is dead stock so, it's important to understand the effect of seasonal items.

If you have decided to order seasonal items, you should look into the historical data of the sales first. If you don't, you'll end up with dead stock. Selling the products at a deficit even is preferable to not selling them. Adopting high discounts, online selling, and product bundling can be helpful.

  • Product bundling: It is also referred to as kitting. In this strategy, one or more products are bundled up to make a new item. The items are made or sold in the market at different costs. One interesting fact about this method is that one can bundle up fast and slow-moving products together. So, in any case, if the item inside the store is left unsold for a very long period, then it can be bundled up with fast-selling items. It can also be provided as a complimentary item or with a package.
  • High discounts: This is the easiest way to deal with dead stock. The summer discounts and sales for stock clearance are examples of special promotions which most companies do for removing stock from inventory. It can be done by giving heavy discounts that grab consumers' attention.
  • Online selling: It can be used to find product buyers for sale in the items which are challenging to sell. In online marketplaces such as eBay and Shopify, the shopping cart allows users to communicate and reach other people. Online selling can be done easily because nowadays as everyone utilizes the internet.

3. Defective products

If the product is defective, it can lead to dead stock. If you are manufacturing the products and items, then it is important that you should resolve the issues related to quality control. If you buy the product from different manufacturers, you first need to check if the product you have received has no physical damage. One more way to eliminate such an item is by following the standard requirements, which can reduce the chance of an item being damaged. Now let us see how to avoid dead stock.

How to Avoid Dead Stock?

If you want to get rid of dead stock and the expenses associated with it, then here are some of the things which you need to follow:

  • Order in small quantities at the time of purchasing the new products. This is done only when you don't know how the new product works.
  • Survey the customers to learn more about the product which they are keen to purchase.
  • Check new products based on customer and industry research instead of going for personal and intuition interests.
  • Use the inventory management software to generate the alert regarding any issues which could be addressed easily and on time. To know more about this visit inventory management software.

How to Manage Dead Stock?

Dead stock is a major problem that occurs when running a business. Even if you cannot nullify it completely, it should be kept minimum. You can follow ordering tactics using the EOQ, ratio of inventory turnover, and reorder point.

This can help you to solve the problem regarding the out-stocking of goods inside the store and warehouse. Use tactics like discount sales, bundling, and other selling channels, including online marketplaces, if market circumstances deteriorate or the products receive less notice than you had hoped. Moreover, if the selling and ordering strategies you made are on track and you still have dead stock, you can create product quality standards that can reduce defective products in inventory.

Improve inventory management

Inventory management is one major cause of dead stock. More specifically, when you don't know about the inventory and what products are setting around and moving, inventory management software can make managing inventory easier. Whether the right data type is in place, one can easily track which products are in stock and calculate the supply number. Another important thing that can be done is to determine whether to reorder points accurately. Moreover, you should also keep track of which items aren't moving with the help of the best manufacturing inventory software.

Proactive discount

This is relevant to understanding what products are selling in the market and knowing the market trends. In short, it's important to know what product is selling right now at a great place. And once you get the idea about which product is trending, you can make a special discount offer on that product, which will increase your sales.

Why Is Dead Stock Bad for Business?

Dead stock items could be bad for business because it is quite expensive to retain them. It can increase the carrying cost, impact revenue, and take up space in the valuable warehouse. A few reasons why dead stock is not good for businesses are as below:

  • Lost money: The main reason that dead stock is bad for business is that it leads to unprofitable investments that lead to lost money. The company can recoup investment inside the inventory only when the products are sold.
  • Increase employee wages: The more stocks are on the shelf, the more effort is required to manage inventory. Counting items and reshuffling the dead stock could result in a high cost for staff.
  • Less space in inventory: The dead stock can consume expensive stockroom space in the warehouse and shelf, which can be utilized for selling the products faster.
  • Increase the holding cost: It is also referred to as carrying cost. It is a type of expense which are associated with storing inventory. The carrying cost includes labor, storage space, and insurance.

Cost of Dead Stock

The cost of dead stock can significantly impact businesses, and can include a number of different factors such as:

  • Storage costs: Dead stock takes up valuable space in warehouses or storage facilities, which can lead to increased storage costs. These costs can include rent, utilities, and maintenance expenses.
  • Capital tied up: Dead stock represents a sunk cost for businesses, as it ties up capital that could be invested elsewhere in the company. This can lead to reduced cashflow and limit opportunities for growth.
  • Opportunity cost: In addition to tying up capital, dead stock can also represent lost opportunities for businesses. This is because the capital tied up in dead stock could have been used to invest in other areas of the company, such as marketing or product development.
  • Inventory management costs: Managing dead stock can also incur additional costs for businesses. This can include costs associated with tracking, storing, and disposing of inventory that is no longer useful.
  • Obsolescence: Dead stock can also become obsolete, which can result in significant costs for businesses. This can occur when technology or consumer preferences change, making certain products irrelevant or undesirable.

We have seen what is dead stock and how to perform dead stock analysis. It is clear that its important to manage the inventory for the business's productivity, control inventory costs and optimize inventory functions. TranZact helps you to manage dead stock status, eventually helping to reduce it and enhance inventory performance.

FAQs on Dead Stock

1. What is an example of dead stock?

Dead stock can be defined as unsold inventory or merchandise which is not used or sold at the given time. Some examples include leftover food items, excess electronic items, and unsold clothing.

2. What is the difference between dead stock and obsolete stock?

Dead stock means the products which are not being sold and have remained in the warehouse for a very long time due to unidentified reasons. On the other hand, obsolete stocks are not being sold due to a lack of demand and therefore, are discounted.

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TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.