Dead Stock in Inventory Management
What is Dead Stock?
Dead stock is sometimes also referred to as dead inventory. Dead stock, according to businessdictionary.com relates to goods that have remained or not sold to consumers before you remove them from the sale. Sometimes dead stock may be retained in the same warehouse as other goods that are on sale, or you may also store them in a separate facility. It is essential to have a good inventory management plan so that dead stock does not accumulate because it may be dangerous for your business. For a business to thrive, you must ensure you do not have dead stock because it can cause losses, both because of poor cash flow and also loss of opportunity on faster-moving inventory. For this reason, it is essential to first take a look at factors or causes of dead stock.
Reasons for Dead Inventory
As a business person, it is crucial that upon ordering merchandise from a supplier or a producer, you ensure that the products are in perfect condition. It would be best if you did it immediately when the goods arrive at your warehouse or retail outlet. It is because after receiving the goods, the supplier will assume that all the goods are in perfect condition, and if any reports occur afterward about defective goods, it will all be upon you. These faulty products will have nowhere to go because you cannot sell them to customers. Thus they will remain in storage leading to dead stock. This kind of dead inventory does not have any positive benefit because the seller will not be able to regain his capital or earn any profit from the goods.
Low Demand or Over-Ordering For Goods
This arises when the available market is not able or does not have the purchasing power to buy the commodities. It may occur because people do not have money at the time to purchase goods, or they have different tastes and preferences. Also, if you provide products in the wrong season, it may cause them not to sell. These factors may cause the goods to remain unsold, therefore leading to dead stock. If you are unable to forecast the demand, there is also a high possibility of you ordering more than you could sell. Therefore you should first check your market’s capabilities to purchase before offering the products. One of the key ways to ‘predict’ and forecast is by understanding your customer’s purchasing behavior. ERP solutions such as Microsoft Dynamics 365 gives you the ability to understand your customer’s historical purchases, and thus gives you the ability to fine-tune your purchasing forecast.
This is also a factor that leads to dead stock- It arises when staff put in charge of interacting with customers do not have the appropriate communication skills. Poor communication causes customers not to be appropriately informed on goods a company offers, thus low sales. Miscommunication can also cause older stocks to remain in the warehouse while newer stocks are being sold. FIFO is a very crucial terminology for those with perishable inventory because the inability to remove older stock first will result in expiry or spoilage. Electronic items such as mobile phones, cameras, television are also prone to such issues because trends change very rapidly. Low sales will cause some commodities to remain unsold, therefore leading to dead stock.
Disadvantages of Dead Inventory
Low profits resulting from defective products remain unsold. If the buyer did not check the merchandise when it was delivered, then he or she will not be in a position to demand the supplier for refund or replacement. Your cash flow will suffer as you are not able to get back the money you have invested. Losses and reduced profits are imminent.
It arises due to dead stock that appears from defective goods. Because the goods are not in good condition, nobody is willing to purchase them. The faulty products have to be thrown away and written off from the inventory.
Dead stock causes space problems because a business has to put aside the goods in another area to create space for other incoming merchandise. It may look at some point pose as a problem because it may be difficult to find another warehouse within a short period. If you are to retain the dead inventory is to in the same warehouse, the stock may eat up space intended for other incoming goods.
If you are to place the dead stock in another area, it may cause the owner to absorb additional costs. This is because the owner will have to rent out another warehouse apart from the existing warehouse. Handling costs- Perishable, delicate, and electronics inventory require additional handling costs because these items cannot be placed in just any warehouse. They may need extra paddings and special handling to ensure that these items do not spoil in the process of storage. There may be additional workforce costs as well as storage solutions (cold rooms, controlled humidity rooms) for these types of inventory. As such, dead stock that is of this nature may require additional handling costs. Insurance costs- To cater for accidents that might occur, you will need to continue paying for insurance for the dead inventory.
Managing Dead Stock
Return to Suppliers
This is the best way to get rid of dead inventory in a business. Quickly return the goods to suppliers while you are within the specified period. The supplier may choose to replace the dead stock with other products or refund the seller. ERP solutions can be pre-set to have triggers so that you can quickly return unsold inventory to suppliers while they are still in pristine condition.
You may give dead inventory to charity as donations. Some commodities may be out-of-date or out-of-season; therefore, it may be challenging to sell; thus, some businesses may choose to give them to the needy as donations. It is good because it helps uplift society and can also be a CSR activity for the company.
Supplement For Other Inventory
Dead stock may be given as a gift when a customer purchases particular merchandise. It helps to get rid of the dead inventory as a selling gimmick. Although you will not be able to get any monetary value from giving it away, you may be able to expedite the sales of other products.
This method is more efficient compared to donation and supplementing it with other products. The seller sells dead inventory at reduced prices compared to when the goods initially arrived. This method is very efficient because the seller might be able to regain capital and, hopefully, a small profit.
Dead stock can be detrimental to a business; thus, it is crucial to deal with inventory management carefully to prevent all the issues associated with it. ERP solutions can provide a 360-degree view of your inventory (at the store and in all your warehouses) so that you can understand the amount of stock you are holding. You would also be able to make a better forecast before replenishing stock or purchasing new inventory.
To find solutions on managing dead stock using an ERP solution, contact us for a free consultation
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