Dormant stocks, also known as dead stocks, refer to products that experience minimal or no sales activity. They pose a significant challenge for businesses as they occupy valuable warehouse space and incur storage costs without generating revenue.
Furthermore, dormant stocks have several detrimental effects:
How do dormant stocks arise?
There are various reasons behind the accumulation of dormant stocks:
How to avoid ending up with dormant stocks?
Here are several techniques to prevent the accumulation of dormant stocks.
A key strategy is implementing good inventory management practices. By leveraging various indicators, you can anticipate your inventory needs. For instance, analyzing sales history provides valuable insights for future purchases, including popular items, seasonal trends, and product utility.
Example: The black t-shirt, a must-have item
Optimizing inventory management helps businesses make informed decisions, reducing the risk of dormant stocks and maximizing profitability.
Recommended reading: How to calculate your reorder point and EOQ to increase profitability
Inventory turnover represents the ratio of inventory value to sales value. Typically, to ensure profitability, businesses aim for a high inventory turnover rate. This is because higher turnover rates mean that goods are moving in and out of inventory more frequently, helping to amortize storage costs.
This metric provides valuable insights into performance. By calculating your inventory turnover rate over a specific period, you gain a clear understanding of the purchasing strategy needed. Additionally, it helps determine the rate of restocking, calculated based on storage expenses and your revenue.
For example, if your distribution company purchased $50,000 worth of products last year and sold $200,000 worth during the same period, your inventory turnover ratio is 4.0. This indicates that you sold four times the value of your inventory during the year, resulting in an inventory turnover of 4 times per year. In this scenario, you should plan to purchase at least four times your stock during the next year.
Access the full calculation here: How to Calculate Inventory Turnover and Improve Your Business’s Cash Flow
To minimize storage costs and avoid dormant stocks, consider adopting a just-in-time (JIT) strategy. This approach involves producing or ordering goods only as needed to fulfill customer demand. By eliminating minimum stock levels and safety stock, JIT reduces the risk of dormant inventory. However, it carries the risk of stockouts during periods of high demand or supply chain disruptions.
For a comprehensive overview of inventory management techniques, read our article: Inventory management: issues, optimization, and methods
To anticipate shifts in product popularity and emerging trends, it's essential to stay abreast of the latest market developments. Regularly monitor social media platforms, specialized media, and influencer channels to stay directly connected to consumer behavior and respond promptly to any changes. By staying informed, you can anticipate future customer demands and adjust your restocking strategies accordingly.
Maintaining a vigilant eye on your inventory, regardless of time or location, is crucial. Equip yourself with an inventory management software, preferably offering real-time tracking capabilities. This software enables you to monitor stock levels, track supply quantities, and assess inventory turnover, while also identifying unsold stock. With this information, you can swiftly implement sales strategies, including promotional offers and marketing campaigns, at the earliest signs of inventory stagnation.
There are various methods to quickly clear out dead stocks and free up storage space, including selling them at discounted prices or transferring ownership:
What is inventory kitting and how can distributors use it to boost sales?
Read our article on unsold inventory for more insights: Christmas inventory management: How to deal with unsold stock
As a last resort, if dormant stocks remain unsold for an extended period, consider disposing of them. While this action frees up storage space, it does not generate any value or profitability for your business.
In cases of overstocking, inquire with your suppliers about potential return options. Familiarize yourself with their policies and conditions regarding stock returns.
Dropshipping offers a solution to bypass stock management altogether, as suppliers handle order fulfillment directly. With this method, orders placed by customers are forwarded to the supplier for shipping, eliminating the risk of dormant stocks.
Read our dedicated article on dropshipping to learn more: How to develop your B2B business using dropshipping
With a well-defined restocking strategy and effective inventory management, you can proactively anticipate and prevent the accumulation of dormant stocks, ensuring optimal performance for your business.
