Dead stock refers to the inventory in a store that is not selling and is unlikely to be sold in the future. Dead stock is an issue that all retailers may face, and understanding how to manage it effectively can boost profitability and efficiency. In this guide, we’ll explore what dead stock means, how to calculate it, and, most importantly, how to prevent it through the clever use of RFID technology.
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Dead stock is inventory that has become obsolete or stagnant. It could be seasonal merchandise that didn't sell, outdated products, or over-purchased items. These items linger in your store or warehouse, gathering dust and taking up valuable space while costing money.
Dead stock can be a silent killer for retailers, as it ties up capital that could be invested elsewhere and can lead to losses due to markdowns, storage costs, and the sheer waste of resources.
Imagine a clothing retailer that has a large quantity of winter jackets left over after the winter season. These jackets are now dead stock, as they are unlikely to be sold until the following winter, if at all.
Calculating dead stock is a fundamental step in understanding the extent of the problem. It's typically calculated by identifying the items that haven't moved over a specific period, like six months or a year, and valuing them at their cost price. That is also why inventory accuracy is crucial for identifying dead stock, as it provides a real-time snapshot of what's actually on your shelves.
The formula used to calculate dead stock is as follows:
Dead Stock Value= Quantity of Dead Stock Items * Cost Price per Item
Besides these variables, it's also recommended to assess the following aspects.
a. Age of Inventory: Determine how long an item has been in your inventory. For fashion, items are often categorized as seasonal or timeless. Seasonal items should be sold within the season, while timeless pieces can stay longer.
b. Inventory Turnover: Calculate your inventory turnover rate by dividing the cost of goods sold (COGS) by the average inventory value. A low turnover rate indicates slow-moving items.
c. Sales Velocity: Analyze the sales velocity of individual products. Products with minimal sales over an extended period are prime candidates for dead stock.
d. Customer Demand: Monitor customer demand trends to identify products that are no longer in demand or have become obsolete.
Selling dead stock can be a challenge, but various strategies can be employed to move these products:
a. Flash Sales and Promotions: Create a sense of urgency by offering steep discounts or running limited-time promotions. Customers love a good deal, and this can help move stagnant inventory.
b. Bundling and Complementary Items: Pair dead stock items with popular or complementary items to entice customers to purchase. For example, if you have leftover winter scarves, bundle them with winter coats.
c. Outlet or Pop-Up Stores: Consider opening an outlet store or hosting pop-up events to sell dead stock items exclusively. This approach can attract bargain hunters and clear out excess inventory.
d. Donate or Partner: Explore partnerships with charities or organizations willing to accept your dead stock as donations. Not only is this a noble gesture, but it can also provide tax benefits.
According to Vogue (2023), as many as 15 to 40 billion garments, of a total of around 150 billion apparel, are never even sold.
Although there are many ways to sell dead stock, as was mentioned above, these garments often end up marked down and put on a clearance rack. When they don't sell at a discount, they are either given to a charity like a second-hand store, incinerated, or thrown away.
So why is this industry-wide trend of overproduction and waste happening?
At its core, this practice of buying extra relates to the fact that retailers plan their purchases never to miss a sale due to not having the right product available to their customers.
To not miss a sale, retailers build in what is called buffer or safety stock, the stock bought on top of the base purchase of inventory just in case it is needed.
Often, a little more buffer stock is added at each point of a purchasing decision's approval, causing the total buffer stock to be much more than necessary.
Retailers turn to technologies like RFID to tackle sustainability challenges.
Preventing dead stock is more crucial than knowing how to sell it. The key to efficient prevention lies in better inventory management, and Radio-Frequency Identification (RFID) technology has been a game-changer for many fashion retailers. Here's how RFID can prevent dead stock:
a. Use Store Stock for Online Channels: RFID allows you to unlock your in-store inventory for other digital channels. Connecting your store's inventory means no more stock gathering dust in your physical store while customers search for it online.
b. Merge Stock Pools from Different Inventory Silos: Many retailers operate multiple inventory silos due to various channels, locations, or subsidiaries. RFID facilitates the consolidation of these stock pools, ensuring you can allocate inventory efficiently.
c. Optimize Supply Chain: RFID technology enables in and outbound verification in distribution centers, reducing errors and ensuring that the right products reach the right locations at the right time. Implementing RFID in your DC also reduces excess inventory and lowers carrying costs.
d. Eventually, retailers can lower their stock holdings without compromising on on-shelf availability and sales. Just by adopting RFID to manage inventories, retailers are experiencing substantial reductions in their overall stock holdings. Studies have shown reductions ranging from 2% to an impressive 13%. This stock reduction frees up capital and minimizes the risk of dead stock accumulation.
By understanding what dead stock is and how to calculate it, you're already one step closer to preventing it. By using RFID to get a clear view of your true stock, merge inventory silos, optimize supply chains, and allocate stock efficiently, you can ensure that dead stock is a thing of the past.