There are different types of inventory in a business. You must understand how the inventory works to ensure your business can manufacture the goods accordingly. One term that is commonly used in the industry is dead stock. The question is, what is dead stock, and what does it mean?
Dead stock can be defined as the products that stay in your inventory for an extended period and do not sell out. Understanding the dead stock is very important in inventory management; otherwise, the products can remain on the warehouse shelves, and they will occupy the space. If you want to understand what dead stock means and other related things, then this article is just for you. So, let’s dive into the world of inventory.
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Part 1. What is Dead Stock?
What is the dead stock meaning? This is the first thing that might come to mind when you hear the term dead stock. These products are simply sitting in your warehouse and have not been sold out for an extended period. These products cannot be returned to the supplier because they can be old and outdated, so there is very little demand for them.
A simple example that can help you understand dead stock is business work in the clothing industry and producing winter coats. However, the winter season has ended, people want the coats, and the ones in the inventory can be considered dead stock.
Part 2. Cause of Dead Stock
There can be many reasons a business can end up with dead stock. Below, we have mentioned some of the most common reasons for this.
– Overproduction of Goods
If you are producing goods, as a company, you must keep track of the stock you manufacture. Overbuying or overproduction can cause dead stock, and if you have poor sales for that particular product, it can cause a lot of problems for you to get rid of the product and earn profit from it.
– Poor Inventory Management
Inventory management is critical when it comes to business. Keeping track of the products in your inventory and calculating the amount sold and the leftover product ensures you don’t overproduce. However, companies that are not attentive to their inventory can lead to the accumulation of dead stock.
– The Changing of Trends
We all know people get things that are trend or seasonal products. Therefore, once the products are out of trend or season, the demand becomes significantly less, and this can eventually cause the products to pile up in the inventory, eventually becoming dead stock.
– Quality Issues
The quality of the product plays a vital role in the selling of the products. If you continuously produce defective or low-quality pieces, then the customers won’t purchase them, and they will accumulate in your inventory, becoming dead stock over time.
– Inaccurate Market Forecasting
The market and customer demand are constantly changing. Therefore, when running a business, you must have trained people who can forecast the market trends correctly. If you cannot do so and produce stock that the customers like, you will have a surplus of the stock, causing it to be dead stock in your inventory.
Part 3. How to Calculate the Cost of Dead Stock
Calculating dead stock is very important; however, it is not as easy as it seems. Below, we have produced detailed information on how you should be calculating your dead stock.
– Calculating Dead Stock Value
The first thing that you need to do is calculate the value of dead stock. Below is the formula that you should be using for this:
Deadstock value = Total units in stock x Unit price
This means that if you had 80 units of dead stock and you were selling each piece from the dead stock at $10, you would do the calculation like so:
Deadstock value= 80 units x $10
Deadstock value= $800
– Calculating Dead Stock Sunk Cost
Another formula that you can use here is the dead stock sunk cost. This means you will calculate the cost of acquiring dead stock. Sunk cost is the amount you won’t be able to earn back, or you won’t be getting any profit margin because this stock won’t get sold.
There is no specific formula when it comes to calculating dead stock sunk cost. It can be different for every company because you need to add the direct costs for manufacturing the stock that becomes the dead stock. The following are the things that you need to add together.
- Raw materials
- Overhead allocated for the dead stock
- Transportation cost
- Labor cost
– Dead Stock Profit and Opportunity Cost
Dead stock is not only bad because it costs money to obtain but also decreases the chances of getting any profit that the company can count on. Below, we have mentioned the formula that you can use for this calculation.
Missed Profit = (Total dead stock units x Price per unit) – Sunk cost
For example, if the company invested in 60 units that are now dead stock and each one of them cost around $6 to make while you planned to sell them for $15, the following is the calculation that you need to do:
Missed Profit= (50 x $10) – (50 x 6)
Missed Profit= $200
Part 4. How to Avoid Dead Stock?
You must avoid the dead stock; if you don’t do this and your stock continuously piles up in your warehouse, it can hurt your business, and you can suffer a significant loss. The following are some of the ways through which you can avoid dead stock.
– Accurate Forecast of the Demand
The first and most important thing is to forecast the demand accurately. You need to decide on how many products you want to manufacture, the cost you want to invest in these products, and whether they will be selling. Effective forecasting and planning of the entire manufacturing is imperative to ensure you don’t overproduce and end up with dead stock.
– Upgrade the Inventory Management Software
Another thing you can do to prevent this from happening is upgrade the software you use for inventory management. If you do it yourself, then ensure you are tracking everything properly. The amount that is being produced, how much the company is selling, and the orders for the product must be done correctly.
Keeping your inventory, data, and tools up-to-date will ensure that you are not missing everything and that all records are correctly maintained.
– Enhancing the Poor Sales
If your company faces this problem due to poor sales, you need to figure out the issue within your marketing team and which ones your company cannot make the sales. There can be many reasons, such as the price for the product being very high, the quality of the products being low, or they being out of trend. Figure out the issues and try improving them to ensure customers get the products and you don’t end up with dead stock.
Conclusion
Managing a business is not simple; so many things go behind the scenes that an average person might not know. One problem that a lot of businesses face is having dead stock. This is the stock that the company produces with the intention of selling. However, it gets less appreciation from the customers, and thus, it remains in the warehouse for a long time. This can be a massive problem for the business because it can reduce its profit margin. We hope that with this article, you know how to tackle this problem and how to calculate the dead stock.
If you are trying to find a business that can help you manage inventory and reduce the chances of dead stock, check NextSmartShip.
