What is dead stock?

Zahi Darwazeh

Dead stock

Dead stock refers to any unsold inventory lying in a company’s warehouse or store for a considerable long period and is also not likely to be sold in the future.

 

Reasons for piling up of dead stock in a company:

While there could be various reasons for the accumulation of dead stock in a company, the key reasons are as below:

Inaccurate forecasting: Higher than achievable growth in sales leads to higher sourcing or production of goods. This results in the pile-up of dead stock.

Low demand: Companies end up having dead stock when the demand for their product drops. This could be a one-time phenomenon owing to some sudden change in the market. For some businesses, it might be a regular event.

For example, T-shirts with a caption of ‘Good Bye 2020’ or merchandise specific to a particular event. Also, industries having products with a lower shelf life are more likely to witness dead stock. For example, perishable food items like milk, leather products which fade with time, etc.

Drop in quality: Lower quality products could result in lower than expected sales, and consequently dead stock. Such a drop in quality could be due to some manufacturing or packaging issues, which results in the rejection of the product by the end-users. This snowballs into bad reviews and ratings by users, which further reduces the sales.

 

How does dead stock harm a business?

Dead stock has various costs associated with it, which impacts a company’s profitability. These could be explained as below:

Purchase and Production cost: The first and foremost cost associated with dead stock is the cost of purchase/production of that product. This includes raw material cost, manufacturing cost, transit cost, etc.

Holding cost: The second cost is the cost of carrying or maintaining dead stock. This includes rent of warehouses, insurance costs, and cost of other utilities required to maintain that stock (such as employee salaries and security wages).

Opportunity cost: The cost of lost opportunity i.e. the funds are deployed in products that are not selling. These funds could have been deployed in purchasing and carrying a more profitable/or better-selling product.

 

How to avoid dead stock?

While some dead stock is inevitable in any business, the same can be minimized through the following measures:

Use of inventory management software: By using such software, the management of a company can continually monitor the stock levels. One can easily identify the triggers wherein new stock needs to be purchased/produced or dead stock needs to be dealt with. Such software usually has inbuilt statistical models which provide critical insight to manage stock levels.

In-depth surveys: Before the production of a particular item, thorough research related to end-user preferences should be conducted. Surveys related to various attributes of the product viz. price, quality, shape, size, color, etc. could be conducted. Testing and getting feedback on a small batch of products before the production of a larger batch could also result in lower dead stock.

Better Communication: Sometimes, dead stock occurs when there is a lack of proper communication channels within various departments of a company. Hence, improving the communication channels in an organization could result in the reduction of dead stock.

 

How to deal with dead stock?

Discounted bundled deals: This includes bundling dead stock with a fast-selling product, at a discounted price. For example, on the purchase of a pair of new shoes, a pair of older shoes could be offered at a discounted rate.

Gifts: This includes giving away the items classified as dead stock free of cost with a fast-selling product. While this will incentivize the end-users to purchase the fast-selling products, companies can also get rid of the holding costs associated with the dead stock.

Return to suppliers: If permissible as per the purchase terms, the products classified as dead stock could be returned to the original supplier, even at a discount.

Donations: This would result in reducing the costs associated with dead stock and improve the company’s market image. Also, if permitted as per income tax rules, companies can avail tax exemptions on donations.

Renovation: Certain products, for example, outdated merchandise could be renovated and refurbished to create new products that would be saleable in the market.

 

Conclusion

Dead stock has various costs associated with them which results in lower profits for a company. This could be avoided by using an efficient inventory management system, improving inter-departmental communication, and thoroughly studying consumer preference for product acceptability. Offering dead stock products at discounted prices with other fast-selling products, donations, renovations, or returns to the sellers are efficient ways to tackle the pile-up of dead stock.