Inventory management is an essential feature of any business involved in the sale of products to customers. The number of products to order from the vendors or manufacture depends upon a host of factors such as demand, market factors, and others. Ordering or manufacturing precisely the correct number of products becomes possible with gain in business experience. However, overproduction or excessive order can affect even the wisest business professionals. What results is inadequate inventory or dead Stock. Read on to know what deadstock is and its implications.
Meaning Of Bad Stock
Inventory that does not sell is bad. The question is what is bad inventory called. The answer is dead Stock. Thus, the definition of dead Stock, if you are wondering what deadstock means, is the inventory that is occupying the shelves of your warehouse or store but has no chance of selling. The amount of money spent on purchasing or manufacturing that inventory is therefore locked.
Deadstock has a detrimental effect on the revenues and cash flow of the business. This is because dead Stock imposes extra costs on the industry. Apart from preventing the company from recouping the cost of manufacturing or purchasing that Stock because it does not sell, deadstock also takes up valuable space in the warehouse or store, which otherwise would have been used to store those products which sell. Moreover, storage costs, primarily when the business rents a warehouse to store its goods, also drain the finances of the said business.
Categories Of Products Included In Deadstock
Products ordered or manufactured in much more than their sales are not the only ones that fit dead stock meaning. Dead Stock also includes damaged products, leftover seasonal products, raw materials past expiry dates, and products not delivered to correct recipients. Products returned by customers are not included in dead Stock.
Period To Become Deadstock
An inventory does not become dead Stock within a few days. Products that show low sales are initially considered as slow-moving inventory. If the products continue to accumulate due to negligible sales, they are categorized as unsold inventory. Finally, in the event of continuing unsold position, the inventory is classified as dead Stock. By the rule of thumb, if an inventory remains unsold for a year, it is called deadstock.
Food and medicines are perishable items. Since such things cannot be stored beyond their expiry dates and must be disposed of, they become dead Stock faster than other categories of products.
6 Reasons For Deadstock
1. Incorrect forecasting of demand by businesses leads to ordering or manufacturing of excessive inventory leading to dead Stock. Inaccurate data, flawed data analysis, and unrealistic market factors often delude industries leading to incorrect prediction of demand for any product.
2. Ordering inconsistencies mean the business enterprise is either stocking up a particular kind of inventory at the wrong time when its demand is low or ordering or manufacturing too many items at the same time. This eventually forces the business to hold on to excessive inventory.
3. Poor sales of a product due to many reasons such as customers disliking its high prices, high competition from other sellers, or the customers preferring modern versions of that product leads to its accumulation on the business company's shelves. It finally becomes a dead stock.
4. A business selling a wide diversity of products is at risk of accumulating dead Stock. The wider the categories of products, the more the number of products to be managed and sold by the business. Any category of product which does not show sufficient sales can become dead Stock.
5. Lousy product quality discourages customers from purchasing it. Thus, if the business stocks defective or low-quality products, the sales would eventually dry up, leading to dead Stock.
6. A sudden dip in demand due to unforeseen market factors can result in an inventory that was likely to sell fast but ends up becoming a dead stock. This is not under the control of the businesses.
Methods To Avoid Dead Stock
Business companies can improve demand forecasting by using inventory management software. Advanced inventory management software tools use machine learning to detect patterns in data related to order histories, economic parameters, competitor activities, and more.
A profitable schedule of placing orders can be determined by analyzing several parameters such as inventory turnover ratio, economic order quantity, and reorder point formula.
- Inventory turnover ratio gives information about the time taken by your inventory to convert into sales. Analyzing past year inventory turnover ratio trends of your business and comparing your company's inventory turnover ratio with the standard inventory ratio of your niche industry helps determine the right amount of products to Stock.
- Reorder point formula gives the minimum quantity of inventory that must be reached before placing an order. Applying this formula to your inventory helps in deciding when to place an order.
- Economic order quantity helps determine the correct number of units of a product to order at a point in time.
Product bundling is a strategy in which slow-moving products are coupled with fast-moving products and sold at different prices. The slow-moving product can be offered as a complimentary item or as a part of a combination. This strategy gets rid of slow-moving products. High discounts can also be provided on products which have failed to sell throughout the year. Stock clearance sales and summer/winter discounts are parts of this strategy.
For businesses stocking a wide variety of items, an analysis of the inventory to determine the fast and slow-moving products is beneficial. The Stock of slow-moving products can be minimized, thereby reducing the chances of dead Stock.
Setting up and adhering to strict product specifications and acceptable quality standards helps stock only good quality products, which are likely to register high sales and not convert to dead Stock.
Contingency plans and a highly adjustable supply chain helps in preventing dead Stock in the event of a sudden drop in demand.
If a business is stuck with dead Stock, it can get rid of it by the below-mentioned methods.
- Selling to online stores
- Giving dead Stock away in the form of gifts on purchases
- Donating to charity and getting tax benefits on it
Overproduction and excessive order can lead to this unfortunate situation if the business doesn’t have an effective inventory management plan in place or is not experienced enough with ordering decisions. The solution? Partnering with a third-party logistics company like Conveyr, which offers software solutions for managing inventory—like Conveyr ™ Warehouse Management Software (WMS). With our help, you'll always know exactly how many of each product you should be storing on your shelves at any given time to avoid dead stock and increase sales. Interested in using our WMS system to take control over your inventory? Contact us today!