Dead Stock 101 – How to Avoid Inventory Obsolescence and Protect Margins

What Is Dead Stock?

The term “dead stock” refers to inventory that is no longer selling, or selling so slowly that it is at risk of obsolescence, or reaching the end of its product life cycle, rendering it unable to be sold. With the dramatic shrinkage of product life cycles due to modern-day technology and the competitive e-commerce landscape, inventory obsolescence happens much more frequently, requiring merchants to act even quicker to sell these slower-moving products.

To understand dead stock and inventory obsolescence fully, it’s helpful to think about how excess inventory is accumulated and why it risks turning into dead stock. Excess inventory is often caused by supply exceeding demand, resulting in slow-moving inventory that can incur expensive holding costs. While excess inventory also involves holding large amounts of unsold inventory, excess inventory usually represents an opportunity for businesses to implement a selling strategy, whereas dead stock represents a liability if companies don’t act fast on this excess stock. Simply put, if a business lets inventory sit idle for too long, they risk inventory obsolescence. 

The longer a product sits in storage, the higher the cost of holding it becomes, which turns excess inventory from an opportunity to a liability for your business.

The Issue of Dead Stock In 2021

As a second pandemic holiday season approaches, warehouses close to the ports are at max inventory capacity due to  record levels of inventory being imported into the US as post-pandemic sales surge. Warehouses across the West Coast and Northeast have an estimated vacancy rate of 4.5%, creating challenges for SMB’s to find enough space and affordable storage rates in warehouses close to ports. 

Due to the reduced capacity of the current supply chain and the rapid growth of the eCommerce market, premium storage rates have increased by 5.59% and, according to a Warehousing Cost and Pricing Survey, 61% of warehouse operators report increasing their rates in 2021. Within the retail industry alone, estimates indicate that dead inventory costs nearly $50 billion year-over-year. 

With growing rates for warehouse storage and record lows in vacancy rates, SMB’s should be strategic about the types of inventory they’re holding, where they choose to hold it, and how much inventory carry costs affect their bottom line. Slow-moving inventory or a high percentage of dead stock could be costing them valuable warehouse space, dragging down their profits, and resulting in lost sales opportunities. Therefore, merchants must not only absorb the purchasing cost and carrying cost of dead stock, but also the opportunity cost of not having sold the product and missing the opportunity to profit at all.  

Why Is Managing and Avoiding Dead Stock So Important? 

As a general rule of thumb, supply chain experts recommend only holding inventory for 3 months before implementing a selling strategy to manage the excess and mitigate any losses. Otherwise, the costs of holding more inventory will begin to deplete a business’s profitability, as merchants often end up paying more for long-term storage than they can make back on a sale. Our Supply Chain expert, Matthew Reid, discusses how businesses may be losing margins on the products they sell because they are paying for more inventory than they actually need. Additionally, not proactively managing slow-moving inventory likely results in having to pay more for long-term storage costs than the product is even worth.

Ware2Go offers our merchants cutting-edge supply chain technology to analyze your inventory, provide commercial insights, and recommend strategies to mitigate costs of slow-moving SKU’s. Through proactive supply chain planning, our team of data scientists help merchants improve their bottom line by mitigating the costs of excess inventory. Watch Matthew Reid’s video below to learn more about how Ware2Go can help manage slow-moving SKUs and prevent dead stock.

The best way to alleviate the problem of dead stock is, of course, to pinpoint its causes and prevent dead stock from accumulating in the first place:

Causes of Dead Stock

• Inaccurate Demand Forecasting – Accurate demand forecasting plays an important role in avoiding unsold and excess inventory that turns obsolete after periods of inactivity. By anticipating consumer demand, analyzing industry trends, and syncing sku-readiness with marketing efforts, merchants are able to more effectively plan and manage their inventory based on accurate demand forecasting models. In addition, most businesses with strategic forecasting models also forecast geographic demand to determine the best location to store their inventory. Using previous years’ sales history, geographic demand patterns, and current industry trends enables companies to make accurate forecasts, manage warehouse storage rates, and lower operating costs.

• Improper Inventory Management – Inaccurate inventory cycle counts, low visibility into order and fulfillment statuses, and outdated manual tracking processes can lead to inventory shrinkage on one end of the spectrum or inventory obsolescence on the other. Merchants that manage their inventory digitally receive a continuous flow of data, helping to visibly pinpoint slow-moving SKU’s and respond quickly by implementing new selling strategies in time to reduce the costs of holding excess inventory.

• Low- Quality Products – Defective products and poor quality are also common causes of dead stock. If customers are not satisfied with a product, they are more likely to return it. Ensuring that products are high quality could greatly pay off in the long run. Analyzing, vetting, and market testing products in addition to partnering with reliable manufacturers will decrease the chance of quality issues, ensure positive customer experience, and mitigate the risk of dead stock.

How to Avoid Future Dead Stock 

• Implementing a Streamlined Multi-channel Inventory Management System – The best way to minimize the risks of inventory obsolescence is by effectively monitoring inventory activity and performance. A streamlined inventory management system helps merchants accurately track product performance and stay on top of opportunities to mitigate any losses due to slow-moving inventory. While merchants are often tempted to purchase larger inventory levels for better deals from bulk suppliers, a proper inventory management system helps merchants accurately forecast and optimize inventory purchasing costs by balancing bulk supplier discounts with inventory carrying costs. Ware2Go uses cutting edge technology to help merchants effectively manage inventory purchases and gain further visibility into product performance through a fully integrated WMS platform called, FulfillmentVu.

• Opting for Smaller Product Levels as a Sales Tactic- Offering smaller runs by emphasizing their “exclusivity” has become an effective selling strategy for merchants who are experiencing small product windows before items become dead stock. Being strategic about which product is worth carrying a larger supply of will help to minimize inventory surplus and the negative effects of dead stock. Because consumers tend to place a higher value on items that feel more exclusive, using a scarcity marketing tactic has become an effective strategy to transform lower inventory levels into an advantage that helps to drive consumer demand. While you may risk losing a few sales, the cost of dead stock may be much higher than the profitability of holding more. However, with the right inventory and SKU management system, merchants can accurately forecast sales and purchase the optimal amount of inventory to meet demand. 

• Proper SKU management – Managing SKU’s is a necessary foundation for inventory management as it allows you to measure the profitability of your products to decide how much inventory you need to hold and how much storing that inventory will cost. As a result, businesses are able to accurately forecast demand and mitigate costs of holding too much inventory. At Ware2Go, our inventory management system not only integrates warehouse, order, and transportation system data, but it also utilizes machine learning and AI to help analyze previous sales histories and seasonal patterns to help merchants accurately forecast demand and optimize inventory purchases. 

How to Deal With Dead Stock – Best Practices

• Strategic Warehousing – If you’re already struggling with dead stock, an important tactic to deal with inventory at risk of obsolescence is strategic warehousing, which, in this case, means choosing the most affordable warehouse to store slow-moving SKU’s. If your business has inventory that hasn’t moved, the best option is to strategically relocate that inventory to a warehouse space that functions as a storage-only space or is located in inner parts of the country where it may be stored at lower rates. Because not all warehouse storage is created equal, partnering with a 3PL logistics service that combines a nationwide, distributed warehouse network helps merchants easily find the right warehouses and negotiate the most affordable rates to store dead stock.

• Discounting or Offering Promotions. One of the most straight-forward strategies to deal with excess and aging inventory in the short-term is to offer it as a “buy one, get one promotion,” or offer a promotional discount. This sales tactic, while not as profitable, can help recover the production cost of the product and frees up available storage space to optimize your inventory for more profitable merchandise. The ability to recognize slow-moving or unsold inventory in time for it to still sell is ameliorated with the proper visibility from an integrated inventory management system. By waiting too long to offer a discount or promotion on these products, merchants risk inventory obsolescence and may be unable to sell the product, even at a discounted rate. 

• Donating Them for a Write-Off on Taxes. Donating dead stock to qualifying charities that allow legal donations in return for tax write-offs is also a strategic defense tactic to mitigate losses. While you may not be able to make back the money spent to manufacture these goods, this strategy often helps cut losses while also maintaining a positive public reputation. For instance, a consumer survey found that 84% of consumers said it was important that a company support charitable causes. 

How 4PL Partners Can Help

• Negotiating Better SLA’s and Lower Rates 

It can be hard for small to mid-sized merchants to negotiate for lower rates and better SLA’s when trying to offload dead stock to warehouses farther from ports and minimize holding costs. With limited warehouse capacity, it can be even more difficult for small merchants with lower volumes to even get their inventory into a top-tier warehouse at all. Ware2Go makes this challenge achievable by offering on-demand warehousing services to negotiate with warehouses on behalf of our merchants to build a nationwide fulfillment network to streamline fulfillment and lower rates. By aggregating the average daily volume (ADV) of multiple merchants, we are able to negotiate better rates and help merchants of all sizes compete with high-volume sellers for this limited space. Contact one of our fulfillment experts for a detailed rate quote for your business.

• On-Demand Warehousing to help scale inventory up or down to meet demand

With peak season nearing, Ware2Go understands that small to mid-sized merchants require the flexibility to scale their warehouse storage up or down to accommodate the changing inventory levels that are needed to meet holiday sales and seasonal demand. Whether related to holiday peak season demand or another seasonal spike, smaller merchants traditionally have been forced into inflexible contracts either locking them into paying for unused storage during off-seasons or over-extending their internal resources to cover peaks without enough storage space. With Ware2Go’s on-demand warehousing model, merchants are able to pay only for the storage space and labor that they use and flex these capacities up and down when needed. Purchasing the optimal amount of inventory to meet demand and flexing storage capacity up or down when needed makes seasonal sales much more profitable by lowering operating costs year-round. 

• Track Inventory With an Inventory Management Software

Lastly, Ware2Go helps merchants implement our inventory management software, FulfillmentVu, which integrates WMS, OMS, and TMS technology to provide immediate insights into inventory levels and fulfillment status. Using this system, merchants are easily able to see in real-time which inventory is selling well and which inventory is dead stock. From there, merchants have the tools to make strategic decisions around inventory allocation, marketing spend, and product repurchasing, helping to mitigate costs in the supply chain and grow bottom lines.

For a full demo of our cutting-edge inventory management software, reach out to one of our in-house experts.