In a way, managing warehouse inventory is a bit like walking a tightrope. You want to always have enough stock on hand to meet customer demand, but you don’t want to have inventory that you can’t move and which just sits on the shelves gathering dust. It’s an ongoing balancing act where, if you trip and fall, you end up with something you most definitely do not want, namely dead stock.
Dead stock refers to inventory items that customers simply aren’t buying. With no purchase orders coming in, the stock just takes up space and generates no revenue. This can be a serious and costly problem. If your business has already paid for the inventory – which is typically the case – cash flow problems can mount quickly if that stock fails to move off shelves. Soon overall profit levels take a hit, and the next thing you know you’re wondering how you’re going to pay next month’s outgoings. In a worst case scenario, excess dead stock can bring a business to its knees.
One of the more insidious aspects of the dead stock problem is that it can creep up slowly, be largely invisible for an extended period of time, and can sometimes be easily ignored… until it no longer can. It can be a bit like the mad aunt who lives in the attic – nobody ever talks about her and you don’t really notice she’s there until she goes crazy with a knife.
So what are the major causes of dead stock? The most common and obvious one is that predicted demand exceeded actual demand. The initial sales forecasts, and the orders that followed it, were simply way too optimistic from the get-go. Another common cause is a shift in buying trends – what customers purchased last month they’re simply not buying this month, and most likely won’t in the months and possibly the years ahead.
Here’s where it can be instructive to seek out answers to an important question:
Why was there such a negative gap between what you have to supply and what is wanted by customers?
Possible answers include:
If you’re not routinely generating feedback from your prospective and actual customers on their wants, needs and preferences, it can be hard to know what inventory items you need, and in what quantities, to keep them satisfied. While it can be easy to get caught up in a never-ending cycle of responding to immediate customer requests, always allow enough time to regularly talk with your customers.
It’s always smart to keep an eye on what your competitors are up to. For example a bit of research may reveal that one of your rivals is about to introduce a product line that you can’t match in terms of price and/or quality. In this scenario it may be best to lower demand expectations (and therefore orders) for your product line against which theirs competes. Knowing the full range of product and price options that are available to your customer base – and responding to them in whatever ways are feasible – can help you stay competitive and avoid dead inventory.
Without access to a crystal ball to tell you what direction your business sector, and the customers who fuel it, are going to take next, the next best thing is to stay as alert as possible to shifting industry trends. You don’t want to be taken by surprise by an upcoming trend shift that your competitors saw coming but which you didn’t. That monthly industry publication that you don’t really have time to read these days … maybe set a bit of time aside to go through its pages.
When customers have a bad experience you run the risk of losing them. And on the way out they’re likely to tell others of their experience. By maintaining high quality standards you’re in a better position to adequately forecast demand for your products and not be left with stock that doesn’t sell because it’s earned a poor reputation.
If your business uses Enterprise Resource Planning (ERP) software, you can leverage historical sales data and other system-stored information to predict future inventory demand and identify poor performers before they become dead stock. However, this is only effective when the ERP user fully understands how to interrogate, produce reports on and analyse the relevant data. It’s critical that your people get it right, so make sure that your ERP system users are well trained in the technology.
If you’re involved in ecommerce, warehousing, retail or distribution, it’s probably inevitable that you’re going to face a problematic dead stock issue at some point. So what can you do about it? Here the easiest thing to do is also the most unpalatable – give the stock away or destroy it and write the whole thing off as a costly and unpleasant experience. While this will certainly free up warehouse space, from a cost‑recovery perspective it’s got nothing going for it.
The Takeaway
For many businesses dead stock is an unfortunate but inevitable fact of life, at least every now and then. But by planning ahead, researching your competitors, keeping up with industry trends, maintaining high quality standards and making the best use of your inventory management technology, you will be well positioned to prevent dead stock problems from becoming calamities.
And when you do next encounter a dead stock issue, there are, fortunately, a number of methods you can deploy to ensure your business doesn’t suffer any more than it needs to. Believing wholeheartedly in the notion that prevention is better than cure, Jiwa is committed to providing the best in inventory management technology.
For any business wanting to keep dead stock to a minimum, Jiwa’s ERP software can play a critical role. Jiwa’s extensive inventory management capabilities can help you avoid dead stock altogether. To find out more get in touch with us today on (+61) 2 9648 3323 or email us at info@jiwatraining.com.
If you enjoyed this blog, please read about How to Set Meaningful KPI’s.
[…] Once you have developed your sales reporting strategy and have applied it in the right way, you will certainly see, before too long, improved sales results. The insights you gain, and the actions you take in response to them, will help set your business up for long-term success. Read the Previous Blog. […]