For companies selling physical products, there’s a fine balance between holding too much inventory and too little. Inventory management, customer behaviour and business experience will usually help get the balance right and avoid excess inventory. But with the best will in the world, you can still end up with dead stock – excess inventory which no longer sells and costs your business money.
Definition of dead stock
Dead stock, also known as obsolete inventory or dead inventory, is stock that’s reached the end of its product lifecycle and is unlikely to sell. Carrying this unsellable and obsolete inventory can affect your bottom line, reduce profit margins, tie up cash in stock, and increase warehouse storage and staff costs.
Inventory can build up in a business for many reasons, including evolving customer trends, poor inventory management, slower sales, defective products, store reorganization and wider economic effects.
Dead stock shouldn’t be confused with deadstock. Growing numbers of retailers use the term deadstock to refer to obsolete stock which has become collectable. Sneakers are a great example, where customers are willing to pay a heavy premium to grab a limited edition pair. Unlike dead stock which can negatively impact sales, deadstock inventory can increase sales and boost a store’s desirability.
How to avoid dead stock
Some obsolete inventory will only ever leave your store one way – in the trash. But there are actions you can take to reduce the chances of that, as well as offloading dead stock items.
Inventory management
Regular inventory management can reduce obsolete inventory. Track best sellers and slow-moving stock with a computerized inventory system to ensure you don’t carry too much inventory and adjust when and how much you re-order accordingly.
An inventory doesn’t become dead stock overnight – it’s a gradual process which you can monitor through regular inventory analysis. Products may sell well initially, then become slow-moving and eventually be classed as obsolete inventory, a.k.a dead stock. Regarding accounting, stock that doesn’t sell for a year or more is classed as a liability and eventually a write-off.
Price reviews
New inventory, like the latest phone model or a must-have dress, will sell quickly and command a high price. However, over time as newer models are released, sales can slow down. Adjusting the price or offering a discount can help avoid obsolete inventory and keep products moving.
Order lower quantities of stock
When introducing new products, keep quantities low until you know how well they sell. Base your ordering practices on customer research and inventory data rather than intuition or your own tastes.
How to get rid of dead stock
The more obsolete inventory you can dispose of the better it is for cash flow. Methods for doing this include: holding clearance sales, offering items as a free gift alongside other big-ticket products, or bundling obsolete inventory items together to create a “new” product.
Dead stock vs safety stock
Dead stock is inventory that won’t shift, safety stock is a buffer. If you have fast-moving merchandise with long lead times, always keeping an amount of safety stock on hand will mean you don’t run out and disappoint customers.
Frequently asked questions about dead stock
How do you write off obsolete inventory?
Inventory write-off is when a company formally acknowledges the products have lost all value and are now unsellable. They record them as such in their accounting and bookkeeping.
Where does obsolete inventory go on the financial statement?
Inventory appears as an asset on a company’s balance sheet. When it becomes obsolete, that amount is reduced by the value of the obsolete stock. At the same time, it’s also recorded as an expense on the income statement.
What’s the difference between slow-moving and obsolete inventory?
Slow-moving inventory still has some value but sells at a much lower rate than is optimal. Obsolete inventory has reached the end of its product lifecycle, that is to say, it hasn’t been sold or used in a long time and is unlikely to be in the future.
