What is Dead stock? | Definition, Cause and Solution

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What is dead stock?

Dead stock refers to any unsold items which are lying in your warehouse or your store for a long time. Dead stock is detrimental to any business, because it not only takes up valuable space but also acts as a bad investment for your company. The amount spent on buying the items from your vendor can only be recovered when they are sold, so stock that isn’t selling represents lost money.

However, dead stock is common for trading businesses. If you are constantly dealing with dead stock and can’t figure out how to avoid it, give this a read.

What are the causes of dead stock?

There can be a lot of reasons for dead stock, but most of them fall into three categories:

1. Ordering inconsistencies

This means that you’re either ordering too many items at once, or ordering them at the wrong time. Simple calculations like Reorder Point, Economic Order Quantity (EOQ), and Inventory Turnover Ratio can help you to follow a more effective schedule for ordering items from your vendors. Each of these tools concentrates on a different area of order management.

a) The inventory turnover ratio gives you an idea of how many days it takes for your items to turn into sales. To give you an example, if your inventory turnover ratio is 10 then, it takes you on an average, 36.5 days (365/10) to turnover your inventory. This tool can help you decide your future strategy based on your past year trends, and it also allows you to compare your ratio with the standard for your industry. Find your inventory turnover ratio here

 b) The reorder point formula is based on your material usage and the number of days it takes for items to reach your store or warehouse after you have created a purchase order with your vendor. This tool gives you a good idea of when you should place your next purchase, so you don’t run out of stock or order too many items and increase your holding cost. Learn more about the reorder point calculator

 c) The Economic Order Quantity (EOQ) is a good way to follow up the previous two calculators. After you know your turnover and the right time to create the next purchase order, the next step is to figure out how many items you should order. That’s exactly what EOQ does: tell you the number of units you should order at one time. It provides an additional layer of security over the reorder point, reducing the chances of both overstocking and dead stock. Find out the EOQ for your business

2. Poor sales

This can happen if your target market doesn’t like your product because of its price, because it’s obsolete or out of fashion, or because your competition is more appealing. If this is happening, you need to rethink your selling strategy and get rid of these items quickly. Strategies like product bundling, high discounts, and online selling are often helpful.

a) Product bundling, also known as kitting, is a strategy where two or more items are bundled together to form a new item and sold at a different price. The best part of this strategy is that you can bundle slow-moving and fast-moving products together. So if an item in your store is unsold for a long time, you can bundle it up with a fast-selling product as a package or complimentary offer. The idea behind doing this is to get rid of slow-moving items so that they don’t become dead stock and hurt your profit margin.

 b) High discounts are probably the easiest way of dealing with dead stock. Stock clearance sales and summer discount offers are examples of the special promotions that a lot of companies run to remove the dead stock from their inventory. Offering a discount can help a company get a lot of attention from consumers who have failed to notice their items previously.

 c) Online selling can help you find buyers for hard-to-sell items. Online marketplaces like eBay and shopping carts like Shopify allow you to reach out to more people, because anyone with an internet connection can access your online store. A wide reach gives you better odds of converting your dead stock to sales.

3. Defective products

If your stock isn’t selling because it’s defective, quality checking standards can help you sort things out. By setting up standards for products or raw materials before they enter your warehouse, you can avoid this situation in the future. Product specifications, packaging requirements, and Accepted Quality Limit (AQL) techniques can help you ensure you’re selling good products.

a) Product specifications

When we talk about product specifications, we are mostly referring to the physical dimensions of the product. If you’re ordering items from a vendor, you can set physical requirements for the products, such as their height, weight, and length. If any item doesn’t meet the requirements, then it can be sent back to the supplier for replacement. This quality check criterion acts as a first level of security and helps to cut down the time needed for subsequent checks.

b) Packaging requirements

Like product specifications, packaging requirements standards can also be applied to incoming products before they’re added to your stock. Good packaging keeps the items safe and secure. Therefore, it makes sense to discuss packaging standards with your supplier before you enter into a contract. You can set standards for parameters like quality of material, type of material, color, and meeting particular government or third-party certifications.

c) Accepted Quality Limit (AQL)

Your Accepted Quality Limit (AQL) is the maximum number of defective items that you will accept in a sample of items picked randomly. It is a quality level that you decide on, mostly based on industry standards. To apply an AQL, you test statistical samples of products instead of checking the entire lot or batch, and based upon the analysis of the sample, you accept or reject the entire lot. For example, if you have received 100 pairs of shoes from your vendor, for your AQL analysis you will examine 10 pairs of shoes. If you have set your AQL at 4, it means that you will accept the batch of items if there are no more than 4 defective items in that particular sample. It’s a good idea to discuss your product, packaging, and AQL requirements with your vendor while you enter into an agreement. To learn more about AQL, including how to determine the right sample size and acceptance level, check out this detailed video

How to manage dead stock?

Dead stock is the sort of problem that can keep on recurring the whole time you’re running your business. Even if it cannot be nullified completely, it can be kept to a minimum. If you follow the right ordering tactics, using your reorder point, EOQ, and inventory turnover ratio, then you can solve the problem of overstocking goods in your warehouse or store. If market conditions falter or your products aren’t getting as much attention as you anticipated, then try selling strategies like bundling, discount sales, and different selling channels like online marketplaces. Lastly, if your ordering and selling strategies are on track and you’re still carrying dead stock, then it’s time to set up quality standards for your products to reduce the chances of having defective items in your inventory.  

So, if you follow all of these tactics, will your dead stock go away completely? Well, there is no certain answer to that, but the above steps can help you identify loopholes and keep dead stock in check. You’ll need to revisit these strategies on a continuous basis and adjust them based on business trends and market conditions. The good news is that once you’ve controlled your dead stock, you will have a better cash flow as the money invested in your stock will generate better returns for your business.

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