Dead Stock in Inventory Management

Dead Stock in Inventory Management

What is Dead Stock?

Dead stock is sometimes also referred to as dead inventory. According to businessdictionary.com, dead stock, refers to goods that have remained or are 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 location. Having a good inventory management plan is essential to avoid an accumulation of dead stock. The impact of dead stock includes poor cash flow and loss of opportunity on faster-moving inventory.

Reasons for Dead Inventory

Defective Goods

It is crucial that upon ordering merchandise from a supplier, you ensure that the products are in perfect condition. It would be best if the goods are immediately inspected upon arrival at your warehouse or retail outlet. Upon receiving the goods, the supplier will assume that all the goods are in perfect condition and any defect reports will not be replaced afterward. 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 Goods

This arises when the available market does not purchase the goods you have. It may occur because your goods are priced beyond what people are willing to pay for or they have different tastes and preferences. It could also be the wrong season or a product that is no longer popular. These factors may cause the goods to remain unsold, therefore leading to dead stock. The inability to forecast demand can lead to over-ordering. 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 behaviour. ERP solutions would also give you an insight into your customer’s purchasing history so you can fine-tune your purchasing forecast.

Poor Communication

Staff that are not able to articulate the benefits of the product you carry can also result in dead stock. Poorly communicated product information results in customers not being able to appreciate the products that you carry. Besides that poor communication in the warehouse can also result in older stocks being sidelined and newer stock being sold. FIFO (First In First Out) is an important warehouse practice as the inability to remove older stock first will result in expiry or spoilage. Electronic items such as mobile phones, cameras, and 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

Reduced Profits

Dead stocks are often sold at a deep discount or a loss. This results in lower profits or no profits. At times, these products are also bundled with other faster-selling products to prevent dead stock. All these measures means that the products are not able to reap the maximum profitability as intended.

Wastage

Defective goods are not sellable and thus will need to be thrown away or written off the inventory.

Storage Space

The storage space that is taken up by dead stock is a cost to the business. Retaining excessive dead stock takes up valuable space that can be used to store sellable inventory.

Storage Costs

There are costs to keeping inventory in a warehouse. Handling fees, storage rental, and manpower are just some of the cost that is involved in storing inventory. At the same time, you may also need to continue paying insurance for dead inventory. All these are additional costs to the business.

Managing Dead Stock

Return to Suppliers

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. If you are using an ERP, you can set triggers so that you can return unsold inventory before they are deemed obsolete.

Donate Them

You may give dead inventory to charity as a donation. Items that are out-of-date or out-of-season but still in good condition will not be sellable but would still be great as a gift to a charity of choice.

Supplementary to Other Items

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.

Discounts

If the product is still sellable but is no longer popular, you can sell them at a reduced price to encourage purchases. This method is preferred as you can regain capital and, hopefully still make 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. An ERP solution can provide a 360-degree view of your inventory across all locations so that you can understand the inventory you have on hand. You would also be able to make a better forecast before replenishing or purchasing new inventory.

Get started with an ERP solution to better manage your inventory. Contact us for a free consultation.