Dead Stock

Dead Stock in inventory management refers to the stock that remains unsold or piled up in the warehouse. It is also known as obsolete inventory. This stock mainly occurs when the producer piles excess inventory, or the product has seen a reduced demand in the market.

Every business owning a warehouse or operating an inventory management system mostly faces this issue. As these idle stocks take up an excess or unnecessary space on the shelves, it becomes difficult to stock any new item in the warehouse. Therefore, discarding or bundling such a list of dead stock items can free the shelf space.

• The dead stock refers to obsolete or idle inventory that cannot be sold in the market. Hence, it stays unsold in the warehouse for many days.
• It is a percentage of the cost of unsold inventory divided by the total inventory in that period. Clearance of such stock becomes crucial to save storage, maintenance, and product costs.
• Many reasons contribute to this situation, namely decreased demand, overstocking, product quality, poor sales marketing, delayed time, and others.
• However, businesses can participate in upcycling, product bundling, promotional deals and discounts to clear this stock.

Dead stock refers to the stock or inventory lying in the warehouse that is unlikely to get sold. It remains obsolete (or idle), acquiring maximum space in the warehouse. This stock can be either in the form of raw materials or finished goods. And it can occur at every level of business. For instance, manufacturers, wholesalers, and retailers are the prime participants in holding this stock. And the list of dead stock items may vary as per the nature of the business. However, the cost of obsolete stock does get expensive at times.

The occurrence of obsolete inventory can turn expensive if it is not monitored on a daily basis. As a result, many businesses implement various inventory methods to calculate the cost of this stock.

Following is the formula for dead stock:

Dead stock = (Cost of unsold inventory/ Total inventory for the period) * 100

Methods like the inventory valuation method and sunk cost method can help with the calculation. This record of this stock may help in better calculation. Therefore, businesses try to maintain proper records for accurate results. As a result, the occurrence of this stock reduces, and new stock can be restored.

However, this stock may raise other associated costs if it is not monitored. The basic cost that occurs is the product cost. Unless the product gets sold, the purchase cost is still due to recover. Likewise, the storage costs of keeping the items in the warehouse are also prevalent. In contrast, if this obsolete inventory is fragile or electronic, it needs a regular checkup. As a result, a maintenance cost also gets added.

The prevalence of dead stock has been common among businesses for a long time. However, many reasons cause obsolete inventory. Let us look at them:

#1 - Decreased Demand

The foremost reason for obsolete stock is the inaccurate demand for a product. Misleading or wrong interpretation of the future demand can compel the producer to produce more quantity. It may pile up the warehouse shelf on decreased demand. Likewise, any perishable goods may also experience expiry. Also, it may lead to a slow-moving product line since it is difficult to convert into cash. 

#2 - Excess Purchases

Manufacturers often tend to produce excess inventory to stock up their warehouses. Likewise, even wholesalers and retailers purchase excess items for trade incentives. However, the post-effect of this stock is visible in the later stages. Although traders receive heavy discounts on their purchases, the inventory turns dead due to uneven demand.

#3 - Poor Sales Or Marketing

If the products are not well marketed and advertised among the customers, chances of profits are reduced. Due to this, the sales may drop with the associated demand. Thus, the dead stock occurs if the business has overstocked the warehouse and receives no demand.

#4 - Product Quality

In addition to the above reasons, the product quality also matters. If the inventory sold is mostly defective, the customers switch to another brand. Hence, such products pile on the shelves, resulting in dead inventory. With these defects, customers will tend to return the goods. As a result, the products may not be sold, creating an obsolete effect.

#5 - Long Or Delayed Lead Time

When the business orders little inventory, half of it turns into finished goods. However, the rest of the production may remain incomplete. As a result, the unfinished stock may turn stale for the business.

Let us look at some examples of dead stock to comprehend the concept better:

Example #1

Suppose Forger owns a nachos chips-making business in Los Angeles. He has a 2000 square feet acre of land that has a manufacturing plant. On average, they produce more than 1 million packets and supply them to domestic and international markets. However, in recent months, a new chip brand that is popular among Gen Z and millennials has entered the market. As a result, the demand for Forger's nachos dropped by 20%. Also, the retailers and supermarkets reduced the order quantity. In no time, around 70% of the inventory turned dead.

In this case, a major mistake accounted for this obsolete inventory. Before the entry of the rival, Forger was confident about the future demand. He estimated that they will continue to acquire 80% of the chips market (a 10% increase compared to earlier years). As a result, he increased the production likewise. However, the forecast went wrong, and half of the stock remained unsettled.

Example #2

According to a recent news update as of November 2023, the Australian streetwear brand HoMie has collaborated with ABMT Textiles for a dead stock liquidation. The news states that the former agrees to qualify its dead stock for clearance. And they have established the first upcycling project to clear this stock.

This project ensures that the items from the dead stock register of popular brands will be converted into new garments. Likewise, its profits will be used to support the homeless youth.

Since obsolete inventory creates a nuisance for the business, it must be converted into sales. As a result, there are certain steps mentioned that can turn dead stock for sale. Let us look at them:

#1 - Upcycling

One of the best ways to clear dead stock for sale is to go for upcycling. Businesses can partner with other brands to use this stock as a raw material. Likewise, they can curate a new product that utilizes this inventory. They can fix the defects and sell them again in the market. As a result, the cost is also reduced, and the maximum outcome is achieved.

#2 - Promotional Discounts And Deals

Another option is to advertise the product on the website and social media platforms. It will allow the occupied space to exit from the warehouse. In addition, customers can buy them at a discounted price and good quality. For example, at the end of November, many brands announced Black Friday clearance sales to avoid any possibility of dead stock. Also, they can bundle such items with the most sold products to settle the cost.

#3 - Deadstock Liquidation

Such liquidation occurs when the firms fail to make adequate sales from their business. As a result, when they are about to dissolve, many announce stock clearance. It is a great way to recover losses. Hence, any dead stock for clearance can provide effective returns.

Following are different ways to avoid any dead stock inventory within the warehouse. Let us look at them:

#1 - Proper Inventory Management

The first step is to have a proper inventory control system within the organization. It enables a systematic flow of products from the plant to the warehouse and finally to the customers. Firms can invest in inventory management software and create a dead stock register to track inventories. Also, they can hire individuals who can manage the entire process. These supervisors will monitor the production process. As a result, the chances of defective products will be reduced and obsolete stocks, too.

#2 - Accurate Estimation Of Future Demand

Businesses and manufacturers can hire professionals to forecast the future demand for their products. It will ensure that no excess production is happening in contrast to the predicted demand. Also, the possibility of obsolete inventory drops.

#3 - Ordering In Small Quantities

Lastly, retailers and producers can order stock in small quantities to avoid dead stocks. If they implement this strategy, the products may not stand till expiry. Also, fast clearance will ensure no pile-up on the shelves. Besides, the sales turnover ratio of the business will also stabilize later on.

This article has been a guide to Dead Stock and its meaning. Here, we explain its examples, how to avoid and turn it into sales, and its causes. You may also find some useful articles here -

• Slow-Moving Inventory
• Days Sales in Inventory (DSI)
• Cost Reduction