From time to time, all businesses have dead stock troubles. Whether it’s issues with quality, inaccurate forecasting or unpredictable economic events, inventory problems happen.
However, despite its regularity, dead stock should always be avoided. It stifles cash flow, ties up capital and clogs storage. In this article, we’re breaking down the causes and costs of dead stock and how to shift it.
Jump to a section:
- Dead stock meaning
- What causes dead stock?
- What are the costs of dead stock on business?
- How to get rid of dead stock
- How to offset dead stock losses
Dead stock meaning
Dead stock refers to items a seller is unable to sell. It’s also known as dead inventory or obsolete inventory and can damage business.
Make sure you don’t mix dead stock with deadstock. The latter is the name given to rare items of clothing and trainers that are brand new but unsold. Often, these items are vintage or from discounted clothing lines so sell at a premium price. In contrast, dead stock goods are costly.
Goods can become dead stock if damaged, delivered incorrectly or out of season. Additionally, expired raw materials may be considered dead stock. However, returned items aren’t as they have not explicitly been sold to a customer.
When do items become dead stock?
In some cases, items become dead stock very quickly. For example, food and medicine must be used within a specific timeframe. This gives them a small window to be sold before they become dead stock and, ultimately, unusable.
For other items, reaching dead stock status can be a lengthy process. Initially, they have to be considered slow-moving. This means they aren’t selling as quickly as expected.
From here, the items progress into excess inventory if the problem persists. Finally, they become dead stock; they’re not selling, the shelves are full and storage is bloated.
There is no set dead stock date. However, for accounting purposes, inventory unsold after a year becomes a liability and is classed as dead stock.
What causes dead stock?
There are many ways items can become dead stock. Some can be controlled and others can’t.
Businesses of all shapes and sizes experience dead stock, even those with thorough inventory management processes. It can be difficult to predict things like demand trends, for example. And occurrences such as black swan events can have significant economic impacts while being near-impossible to predict.
Let’s look at some of the causes of dead stock.
Occasionally, businesses misjudge demand and order more stock than they can sell. Forecasting is never water-tight and errors are guaranteed to happen from time to time.
Aspects of forecasting such as inaccurate data, over-ambitious expectations and unpredictable events (as mentioned earlier) may all play a part.
A business might find itself with dead stock due to poor sales. It’s in the business’s hands to set the right prices, choose the right products and satisfy the needs of its target market.
If customers find the goods too expensive, out of fashion or inferior to a competitor’s products, they won’t buy them. With no products leaving the shelves, the business risks facing dead stock.
A challenge for businesses is to find the right variety of items to sell. By offering a wide range of products, a business can expand its customer base. However, an overload of SKUs means more items to manage and more to sell.
Without the right balance, businesses will have too many products to handle and land themselves in dead stock trouble.
Destructive product offering
Much like having too much variety, businesses may find themselves with dead stock if they offer items that are too similar.
Let’s say a business sells a wide range of t-shirts from multiple brands. If the business stocks too many t-shirts of the same colour, material and style, its customers may lean towards a particular brand. This leaves the other t-shirts hanging on hooks and clogging up storage.
Poor quality products
It might seem obvious, but stocking poor quality items is a dead stock dead cert. If customers think a business’s products aren’t worth buying, they won’t buy them.
To avoid low quality, unsellable stock, businesses should set high standards for raw materials and products used in manufacturing. They can target product specs and packaging requirements and set acceptable quality limit (AQL) standards.
What are the costs of dead stock on business?
Above all else, dead stock is expensive and bad for business. Sellers invest in their inventory to make money. When their items don’t sell, they’re losing out on their investment.
Additionally, dead stock items take up space and require extra management. As items continue to flow in, but few go out, businesses have to find – and pay – for more storage space. They’ll also need to fork out additional labour costs and insurance to keep their products covered.
All of this dead stock will need to be managed, leading to higher staffing fees. A business may require its current employees to work longer hours or hire new staff altogether. Ultimately, this ties up more capital on stock that isn’t going to sell.
Inventory carrying costs are just one of the downsides of dead stock. While its shelves are full, a business faces an opportunity cost. It’s unable to bring in and store new items due to the lack of storage space. These items could sell faster and bring in more revenue.
How to get rid of dead stock
Dead stock happens to businesses all the time – it’s not always a negative reflection of business performance. Fortunately, there are ways businesses can get rid of dead stock, freeing up capital and storage space.
Here are some to consider.
Giving customers a free gift can be a handy way to get rid of stock and improve customer-brand relationships. A study by Harris Interactive found that 90% of people are at least somewhat likely to buy more frequently from an online retailer after they’ve received a free gift.
Although these gifts won’t solve revenue issues through sales, they will help to clear space and ease inventory carrying costs. To keep losses to a minimum, businesses could think about offering gifts to customers who spend a certain amount.
Similarly to free gifts, offering customers items as part of a bundle is a way businesses can shift dead stock. Crucially, these bundles will need to contain similar items. Otherwise, customers may feel they’re being forced to buy goods they don’t want or need.
Instead, businesses should look to match dead stock items with popular items to help move the stock. For example, offering an unpopular toiletries bag at a discount price when bought alongside a customer-favourite razor and shaving foam.
Everything must go. Adding discounts to items is another avenue businesses can explore to make their slow-selling stock more attractive.
Depending on their storage situation, businesses can either take small or large cuts off their current prices. The larger the cut, the faster the items are likely to sell. However, bigger discounts lead to heavier losses.
Discounts and sales might mean a business’s profit margins fall short. But they do kick-start some cash flow and clear storage space for other items.
Return to sender
Another method for businesses to investigate is returning dead stock to items to the supplier. They might struggle to get a full refund, but suppliers may offer to buy some stock back at a reduced rate.
Businesses will need to factor in return costs such as restocking and shipping fees. Also, the supplier could offer credit rather than cash as a refund. In this instance, a business would need to identify the issue with the original stock. If the problems weren’t supply related, a credit offer may be suitable.
Donate dead stock
One of the many challenges facing today’s businesses is sustainability. Environmental, social and governance (ESG) criteria are holding companies to account for their impact on the world. And consumers are taking notice.
Statistics published by Aflac suggest that 77% of consumers are motivated to purchase from companies committed to making the world better.
By offering their dead stock to good causes, businesses can showcase their commitment to ESG and corporate social responsibility (CSR). In doing so, businesses can clear their stock and attract new customers.
For more about modern business and sustainability, read our article on the top challenges facing today’s corporate treasurers.
How to offset dead stock losses
Dead stock can significantly damage businesses financially. The losses incurred by reduced revenue, additional storage fees and employees’ wages may leave businesses looking for solutions.
Fortunately, businesses that make international payments can offset some of these damages with a refined foreign exchange (FX) strategy. By exquisitely managing cross-border transfers, businesses can mitigate the risks of FX market movements. This keeps their payments safe from unpredictable, negative shifts in the market.
At Privalgo, we create effective FX strategies for our clients to protect their payments from market movements. Speak with one of our Foreign Exchange Specialists today to see how we can help.