What Is Dead Stock? A Comprehensive Guide

E-commerce is a fast-paced industry where retailers must stock the hottest items. In this model, some portion of a company’s inventory will inevitably become obsolete. Those unsaleable items, commonly called dead stock, represent significant potential losses.

But what is dead stock, and what are the consequences of unsold products gathering dust in your warehouses? We’ll answer these questions and explain how to avoid accumulating dead stock and save your profit margin if you buy items that remain unsold.

Defining dead stock

The traditional dead stock definition refers to inventory that’s physically on hand — often in a storage facility, such as a warehouse — but unlikely to ever sell. This is different from returned stock, which the customer purchased and sent back.

You may also see dead stock referred to as:

• Excess inventory
• Overstock
• Obsolete stock
• Dead inventory

How to determine if an item is dead stock

What’s the difference between dead stock and items that are just slow to sell, and how can you tell which is which?

• Follow the inventory rule of thumb. Inventory that sits unsold a year after it’s ordered and delivered to the retailer can be considered dead stock. But seasonal items are subject to a much shorter time frame and become a liability weeks or even days after a holiday passes.
• Look at the inventory turnover ratio (ITR). This calculation measures a company’s efficiency in using up inventory. Simply divide the cost of goods sold by the average inventory value over a predetermined period. An ITR between four and six indicates that restock rates and sales are balanced. Numbers outside that range might spell trouble.
• Honestly assess quality and condition. Products that fall short of quality standards are extremely unlikely to turn a profit. It’s best to accept this instead of wasting time and resources prolonging the inevitable.

Causes of dead stock

When a retailer designates products as dead stock, meaning they're confident the items will never sell, they’re admitting they’ve taken a loss. Understanding why dead stock happens helps prevent future losses and improve overall inventory management.

Here are several reasons products turn into dead stock:

1. Bad inventory practices

Manual inventory management increases the likelihood of human errors, such as inverting an SKU or UPC number or double ordering a product due to miscommunication.

Another common inventory management mistake is ordering more products than you can sell. This usually occurs when orders are placed without reviewing previous sales patterns or properly forecasting future sales.

2. Sales cannibalization

Carrying multiple similar products can result in poor sales for both SKUs. For example, say you stock a pasta brand that sells a 16-ounce box of spaghetti. You decide to take on a similar 16-ounce box of spaghetti from a second brand, and you’re able to offer it at a price point 10% lower than the first brand.

Customers will likely switch to the second brand if the quality is similar. In this instance, you’ve just cannibalized your own sales.

3. Subpar sales

Sometimes, you expect a product to be a huge hit and stock it accordingly to avoid a backorder. Then, you discover (far too late) that customers aren’t as enamored with the item as you predicted. This is common when the hype over a long-awaited release fizzles out soon after the product’s launch.

Perhaps the product receives poor reviews. Maybe the brand gets caught up in a controversy. Sales can also plummet if a competitor comes out with a similar product that’s more appealing.

4. Issues with product quality

Defective products often turn into dead stock. After all, you can’t ethically sell items that fall short of quality and safety standards. Whether there are packaging defects or missing parts, that inventory should never wind up in customers’ shopping carts.

How dead stock impacts businesses

Dead stock inventory isn’t just inconvenient; it can also drag down businesses that have invested considerable resources in obtaining and storing products.

Companies lose money on dead stock for the following reasons:

• Lost revenue. Dead stock is unlikely to be sold by definition, meaning it’s difficult to recoup the money spent on those items. You end up with a slew of items sitting in a warehouse or storage space. They may be difficult or even impossible to liquidize. You’re also losing money from items that could be ordered, stored, and sold using the cash directed to the now-dead stock.
• Storage costs. Dead stock must be stored somewhere; renting or paying mortgages associated with those storage spaces is expensive. You’re also paying for utilities, security, and other peripheral costs to keep the inventory safe until you decide what to do with it.
• Labor-related expenses. Even dead stock inventory must be managed. That requires hiring employees or rearranging staff schedules to monitor warehouses, identify inventory pain points, and find ways to fix dead stock-related issues.

Tips to avoid creating dead stock inventory

The first step toward avoiding dead stock inventory is streamlining inventory management. Here are some ways to increase efficiency:

• Improve your forecasting. Use inventory management software and sales apps to develop a data-backed estimate of the likely sales for any given item. Base your ordering on those estimates.
• Refine your inspection process. Ideally, poor-quality products should never make it past your warehouse’s dock. Train your team to inspect deliveries upon receipt and only sign for products that meet strict quality and packaging standards.
• Conduct market research before buying into trends. Talk directly with your target consumer base to see what they want, what they need, and which viral products they find interesting but aren’t likely to actually purchase.
• Automate the ordering process as much as possible. Reduce the likelihood of human error with technology, such as EDI, to double-check orders and streamline vendor communication. You’ll catch mistakes before they have a chance to wreak havoc and avoid pitfalls, such as double ordering.

Ways to sell off or otherwise get rid of dead stock

If you want to dispose of old inventory without chucking it in the dumpster, you need to get creative. Try these ideas to bring dead stock back to life (or finally lay it to rest):

Return to sender

Check your supplier’s policy on product returns. Some suppliers may agree to a partial refund or refund-credit combo. This won’t necessarily make you financially whole, but it can soften the blow. Just be sure to read the fine print. You may be on the hook for return shipping or restocking fees.

Create product bundles

Pair in-demand products with dead stock to create bundles that are attractive to consumers and recover at least some of your investment.

Give dead stock away as a gift

If you have stale inventory that’s free from safety or functionality defects, consider offloading it with a giveaway. You can give the first 100 customers one of those unsellable teddy bears or offer a free (and woefully overstocked) branded tote bag with every purchase over $10.

Put dead stock on clearance

You often see seasonal items on clearance, such as Halloween candy that’s 70% off come November or pool toys for pennies on the dollar during winter. This is likely because the retailer overestimated sales, and now they’re left with dead stock they don’t want clogging their storage.

Even if it means you’ll only break even on the product itself, clearance discounts save money on storage, labor, and inventory.

Donate it

Donate to verified nonprofits, and you may be able to turn your dead stock into a tax break. Track the monetary value of all donations and consult your accountant to see which tax regulations may apply to your situation.

Ensure products are in good shape before donating and match up donations with organizations that can best use the items. For example, you might split up household goods and pantry ingredients, with the former going to organizations that provide long-term housing to those in need and the latter going to a food bank.

Discover new ways to avoid dead stock with Orderful

Stop dead stock and inventory woes in their tracks by adopting technology that improves visibility, accuracy, and efficiency. Reach out to an Orderful expert today to see how we can help simplify your EDI integration and ensure you always get the most out of your wholesale buys.