The Dead Stock Survival Guide for Small Manufacturers
Okay, we need to get this out of our system, and this will be fun for the horror fans who skulk among us.
When there is no more room in inventory, the stock will flood the shop [floor].
Right, firstly we apologize to any George A. Romero fans we might have offended for repurposing and rephrasing that quote.
Secondly, even though the quote was originally referring to a less than convenient zombie outbreak, the sentiment still applies when it comes to inventory management.
Today, we’re looking at the zombie equivalent of the manufacturing world, dead stock.
Remember those horror stories you heard when you were growing up? Such and such a place are haunted by a young maiden who was left at the altar on the day of her wedding and now spends her free time terrorizing those who dare venture to the location.
Creepy. But, the issue with these stories is that more than likely, they’re not true.
But if you really like a scare (and you’re a small business owner who manufactures their own goods) we have a spooky tale for you. The worst part being, it’s true!
Like the unwed specter, sometimes your items don’t sell and get left behind on some unlit shelve in your inventory. And it sits there, surviving by eating up space and devouring your company's capital.
You don’t need this zombie-esque product doing all this munching behind your back, so we’re going to teach you how to exorcize dead stock and get more control on your inventory.
So, let’s begin, assuming you don’t want to get overrun by the dead stock.
Cue lightning strikes.
What Is Dead Stock?
Dead stock is basically products which don’t sell and wind up being stuck in inventory. There are several reasons as to why you end up building dead inventory:
— An item’s popularity;
— An item has become obsolete;
— Overzealously stocked too much inventory; or
— Bad inventory management means an item has been forgotten.
However, there is one more factor that was intentionally left off the list, because this is probably the biggest reason as to why items become stuck on shelves.
This reason is denial!
You might say to yourself, “It’s not doing any harm,” and, “it’ll sell, eventually.” But this denial is only prolonging something which is ultimately damaging your business.
Regardless of the reasons you may have ended up with a dead stock infestation, they all lead to the same issues.
If you do not curb your dead stock, you can expect to take up space for products which do earn you that sweet “cha-ching” and drive up your carrying costs.
Don’t kick yourself if you do have dead stock in inventory, many companies discover a literal graveyard in their inventory.
These sneaky products which have become squatters exist under the ghost economy, which you might not realize could be costing your business 11.7% of its revenue.
The biggest tip we can give you for avoiding dead stock is to improve your inventory management techniques, and the best way to do this is by adopting an inventory management software into your business.
Businesses without good inventory management systems are the most prone to gathering dead stock, leaving their products to become forgotten and even obsolete.
For more cultural references, and to move away from the horror theme, without inventory management software your products can become just like Wheezy, a squeaky toy from Toy Story 2, who sits abandoned on a top shelve, “I’m just one stitch away from here, to there [gestures toward a yard sale].”
Though, Wheezy does present some good tactics for dealing with dead stock (sorry Wheezy). But before we move on to that we need to make something crystal clear.
Dead Stock vs Deadstock
There’s a lot of confusion surrounding the correct terminology to use when talking about the issue of dead inventory.
Is it dead stock or deadstock? Does it matter which spelling you use?
If you investigate other pages on the internet, they might use deadstock. However, this is technically incorrect as it means something else.
So, just to clear up any misunderstandings:
Dead Stock: Inventory that hasn’t been sold for an extended period of time.
Deadstock: Inventory which isn’t manufactured or stocked anymore and often comes with a premium price.
Deadstock is a term mainly used by resellers.
We recommend checking out this “passionate” explanation on what does deadstock mean when talking about sneakers.
But now you don’t need to worry about confusing the two in the future. Just remember that dead stock means unsold items that need to be replaced by money making products, and you should be fine.
What Causes Dead Inventory?
Most horror film dilemmas come from an issue that the protagonists either directly or indirectly caused.
They fooled around with an Ouija board and now demons are causing a ruckus; they accidentally invited a vampire around for dinner and now the bloodsucker has misunderstood what's on the menu; or they wanted to create life but, whoopsie, made a monster instead.
The same can be said for dead stock, it’s created from a problem that might be obvious, not so obvious or one that you’re actively ignoring.
Being able to identify the causes of dead stock can help you tackle the problem.
So, the causes you should be keeping an eye on are:
1. Defective Products
Something is wrong with your product and its affecting sales. This could be due to poor engineering or design. Although this type of dead inventory is the least troublesome kind as simply repairing the product might save it.
2. End of Season or Product Life Cycle
Are the products you make particularly popular during seasonal periods? Like maybe you make products that are more popular during winter or make good gifts? It might be worth looking into the products life cycle to determine which stage it is potentially at.
3. Loss of a Significant Customer
Maybe you’ve lost a loyal customer(s) or contract, and this has greatly affected the sale of your products.
4. No Demand
This is the hardest and, let's be honest, saddest dead inventory to deal with. Low demand could come from the product becoming less popular, a newer product has unfortunately rendered yours obsolete, or maybe you’ve overestimated how popular the product will be on the market. The only thing you can really do here is cut your losses and ditch the items as quickly as you can.
You’re not accepting reality and you’re keeping products stocked even though it doesn’t ever leave with a customer. It doesn’t have to be that your product isn’t in demand, it might just be that you’re pricing is too high. But, instead of lowering your prices you’re assuming that customers will eventually pay what you’re charging.
For example, desktops and laptops face this issue regularly. At first, the product might be a high-end device. But eventually, it will be in competition with a competitors PC and become outdated. Charging at the original price may drive away sales as other options will be available for the customer.
If you want to avoid being a manufacturer who is in denial, try asking yourself this question when looking into your inventory:
Are the benefits of holding the item better than simply freeing up space?
Be warned! You might be mistakenly thinking that the inventory is not selling. However, it could be that the products are just slow moving inventory (SMI) instead, and not beyond hope.
Though, this is still an issue you will need to solve as SMI’s will still keep inventory space tied up.
One thing is investigating the underlying cause of death of a product, but what about prevention and what to do when you find dead stock?
How to Avoid Dead Stock.
There are a few techniques you can try out when analyzing if inventory is dead or not.
1. Investment Value
Do a quick calculation of your products investment value to determine if a product is or could become dead stock.
2. Shelf Life
Maybe the items you sell only have a certain amount of time when it can be sold to a customer, like perishable goods for example. Tracking these items means you can take the appropriate action before it reaches its sell-by date.
Looking at your turnover can help you identify surplus inventory and see the profit margin of your products.
4. Demand Planning
This is probably the most pre-emptive thing you can do. By performing some demand planning you can estimate the level of inventory you should have to meet customer demand from your forecast.
5. Survey Customers
Why not ask your customers what they think about your products? They’re going to be brutally honest and help you identify any issues. Customer research allows you to avoid pushing products on gut instinct and will only improve your products performance.
6. Good Inventory Management
This step is going to help your business eliminate dead inventory exponentially. Make and sell smaller quantities to monitor how well your products are performing. This will help you in generating accurate demand forecasts and refine your inventory management skills.
However, if you implement a cloud manufacturing software into your business, you won’t need to worry about performing these tasks yourself as it will all be calculated for you on the software.
Without this software dead stock can remain in inventory without going noticed, raising your storage costs, including:
— Rental costs of the warehouse;
— Security; and
If you follow these steps carefully you can quickly identify the current level of dead stock and decide how to best deal with this.
By regularly monitoring your stock levels, you’ll be able to prevent more dead inventory building in the future.
This will also be helpful for improving profit margins on products and better determine what prices you should set on them.
So, that’s prevention, but when confronted face-to-face with dead stock, how do you survive this encounter?
How to Eliminate Dead Stock.
Thankfully, unlike the horror films, dealing with dead inventory isn’t as grueling as having to remove a zombie's head or throw a head of garlic at an approaching Dracula.
But the quicker you dispose of this “leech” the quicker your business’s health will improve.
So, what tactics can you use to sort this issue out?
1. Promotional Deals
Discount. Fire Sale. Everything Must Go. Basically, get it out of there as quick as you can by lowering your prices!
2. Inventory Kitting
You can try employing inventory kitting, often referred to as product bundling or cross-selling. If the discounts still aren’t getting the customers to bite, maybe try bundling the dead stock alongside products that are selling. “Buy one and get one free” or packaging dead stock with other selling items, those sort of deals.
PRO TIP: Mystery boxes or parcels are ridiculously popular now. How about creating your own mystery box with several products to get rid of your dead stock?
3. Inventory on Consignment
If you’re unable to sell your inventory, maybe a retailer or wholesaler will do a better job? See if it’s possible to arrange a consignment inventory agreement with another business to sell your products.
4. Liquidation Retailers
Liquidation retailers sell items at huge discounts or at an auction. Businesses who are usually going into liquidation sell their assets through liquidation retailers, but they do also accept unsellable inventory.
Charities will be more than happy to take the product off your hands, and it’ll be a good deed done! Also, depending on your tax jurisdictions, you might even be entitled to a tax write-off!
Look, most of these tactics will make your profit margin look disastrous. However, you’ll be able to recoup these losses by holding inventory that sells and saving on your carrying costs.
The objective when it comes to dead stock should be to get rid of it as soon as possible.
What did we learn? Well, unlike an apocalyptic horror film, dead stock isn’t the end of the world.
Now that you know how to detect, prevent and respond to dead stock you can immediately start recuperating that lost revenue.
But let's just quickly reiterate the two major things you need to do to avoid storing it again in the future:
— Accept reality. If something isn’t selling, try and shift it out of your inventory using one of the methods above as soon as possible.
— Get yourself inventory management software!
Despite you and your employees' efforts, mistakes happen, inventory isn’t properly accounted for and before you know it you’ve built some dead stock again.
Katana, a smart inventory software that has been developed for manufacturers, by manufacturers, assists small businesses to get better visibility of stock movements with its smart auto-booking system.
With Katana, you’ll be able to get up-to-date reports on inventory movement and track them via your products SKU’s.
Within Katana, when you monitor “Inventory” in the “Stock” screen, it will show the stock levels for all your products and materials. Here you can also see the total “Value of Stock” you currently have and the “Average Cost” per unit.
This video will help you see how Katana works:
Using this will help you find out when something isn’t performing well so you can begin making the relevant plans to phase out your dead stock.
Saving you the trouble of performing these investigations yourself, manually updating your Excel spreadsheets and giving you the breathing space to focus on growing your business.
Now, do you feel confident to take on that immobilized inventory? Feel free to pop us a message and let us know!
Until next time, happy manufacturing!