Dead stock management

Dead stock has a significant impact on the revenue and cash flow of a business. Practising effective inventory management techniques helps to reduce the quantum of dead stock and improves business viability.

Meaning and definition of dead stock

Dead stock is any unsold item which is lying in your inventory for a very long time. It is also called obsolete inventory, which isn’t expected to be sold. Dead stock often includes damaged goods, incorrect deliveries, perishable goods, expired goods, etc. 

One must understand that stock does not become dead overnight. First, such items are moved to slow-moving inventory. Still, if they aren’t sold, then they are categorised as dead stock. 

In accounting, an item of stock that does not convert into turnover after a year is called dead stock. Thus, we can say that “inventory which doesn’t convert to turnover or which doesn’t get sold is called a dead stock.” 

Reasons for dead stock in a business

Poor inventory management techniques lead to dead stock. Some of the common reasons for dead stock are:

1. Incorrect forecasting: Incorrect forecasting happens when a business incorrectly predicts demand and orders too much inventory. Forecasting means estimating from historical data. This estimate can’t always be perfect. Unrealistic expectations often lead to inaccurate forecasting.  
2. Inconsistencies in ordering: Practising inconsistent ordering practices lead to dead stock. In simple words, ordering stock at the wrong time (when demand is low) or ordering too much inventory at a time. Inventory turnover ratio helps you to follow an effective schedule for ordering goods from your vendor.
3. Poor sales: This usually happens if the product becomes out of fashion, obsolete, etc. One must immediately rethink the selling strategies in such cases. Providing discount or product bundling techniques may help in such cases.
4. Defective goods: If the product doesn’t pass the quality test or is defective, there are more chances of that product remaining unsold. When ordering goods from a vendor, you must make sure that they meet quality standards and are not defective.
5. Loss of customer interest: Ordering goods without proper market research and understanding customer needs and desires may often stack up goods with no consumer interest.

Disadvantages of dead stock for business

Dead stock is bad for any business as it increases expenses. Some of the disadvantages of dead stock are:

1. Increased carrying cost of inventory: Carrying cost includes storage space, labour cost and insurance. The more cash a company has tied up in inventory, the less it can meet other important obligations.
2. Increased employee salary: More stock on shelves results in increased inventory management. Reshuffling, counting, timely disposal, etc., results in increased employee costs.
3. Less space for popular stocks: As the dead stock occupies the valuable warehouse shelf space, less space is available for fast-moving inventory.
4. Loss of money: The biggest disadvantage of dead stock is the loss of money invested in buying such stock. Also, if it is sold at a discount, you may not meet the break-even point or generate profits.

Solution to handle dead stock efficiently in business

Dead stock is a problem that cannot be nullified, but it can be kept to a minimum level. Some of the ways to handle dead stock efficiently in business are:

1. Bundling goods: One can get rid of dead stock by bundling it with another product. It means selling the dead stock with a related item at a lower price than customers would pay individually for such things. Try to bundle the dead stock with popular items which are going to be sold anyway.  This way, you can offload dead stock.
2. Offering a discount or a gift: You can at least get rid of the dead stock and minimise the loss by offering a discount. You can also provide a gift to keep the customers motivated to buy such goods. It will also free up the warehouse space, which could be used for stacking more popular products.
3. Returning the goods to the supplier: One option is to return such goods to the supplier. Even if he doesn’t give a full refund, he may purchase the dead stock at a certain percentage of the original price. This may enable you to recoup some losses.  
4. Try to sell using a different sales channel: You can try out a different sales channel such as an online marketplace such as Amazon or Flipkart to sell your products. One can tap new customers by using different sales channels.
5. Donate: You can also donate the dead stock. By doing so, you cannot recoup losses but at least create a good impression on customers and fulfil your corporate social responsibility.