The cost of holding goods in stock is called the carrying cost, this is usually expressed as a percentage of the inventory value. It consists of various components like capital, warehousing, depreciation, insurance, taxation, obsolescence, and shrinkage costs. The biggest contributor of the total inventory cost is this carrying cost or holding cost. Carrying costs should ideally be between 20-30% of your inventory value, no more. Still this being a pretty large percentage, it is an important cost to account for.
When companies are looking for different ways to reduce costs and cut on the operating expenses many times they ignore the inventory carrying costs. Though the carrying costs of fast moving items and goods in demand cannot be taken up for consideration, however the goods which have not seen any demand in the last 10-12 months and is lying in your warehouse dead should definitely be scrutinized. The Dead Stock Inventory management is very crucial to determine where changes can be made to reduce company’s expenses and to explore how your valuable resources of fund and warehouse space can be put to the best use. It’s time to ponder and speculate how much you’re losing through carrying costs by choosing to hold on to these dead stock? Lying forgotten on a back shelf in your warehouse, they’re slowly but surely draining valuable finances which can be otherwise used for growth and business development.
Dead stock is a kind of freeloader that doesn't pull its weight and will pull your business down in the long-term. It erodes your business through :
Non-working capital : You have invested money into merchandise inventory with one purpose; to earn profits. All profits earned as a result of this investment of capital is known as working capital or a return on investment. On the contrary Capital tied-down in dead inventory causes your business to lose profits. Cash tied-up in non-selling inventory is what we call non-working capital!
Accrued Debt and Insurance : Companies often buy goods on account from suppliers. The longer you hold dead stock without liquidating it or clearing it out for new stuff, the more interest you accrue on the debt obligation. Insurance premiums are paid based on the value of goods held in stores. If you store excess inventory, your premiums are sure to increase.
Wasted Warehouse Space : Dead Stock uses up warehouse space that could otherwise be used for fast-moving products. If your warehouse has no extra capacity, then responding to an upsurge in demand for a popular product will require renting or buying additional warehouse space which might not have been necessary if you weren't burdened with your dead stock.
Locked up Finances : Dead stock means inventory that hasn't moved in at least a year. Dead stock is locked up money that isn't contributing to the growth of your business. You also spend money on storing, utilities, security, and insurance. There is significant financial and opportunity costs of capital tied-up in these additional expenses. In resell businesses, carrying excessive inventory may lead to higher finance fees and insurance premiums.
Missed Opportunity Cost : The "opportunity cost" of a resource is the value of the next-highest-valued alternative use of that resource. When outdated inventory is left on shelves for too long, the business misses opportunities for potential sales and profit on newer goods. So the cost is the missed profit that could have been achieved if another faster selling item had been chosen. In case of goods that are perishable, or items that are scrapped completely and thrown out, the business does not recover any portion of its investment from this stock.
The obvious reason is the poor management of inventory. When sufficient attention is not paid to the movement of inventory, dead stock occurs. Inventory has to be monitored very closely and purchase strategies have to be planned accordingly. Unfortunately, many businesses don't have efficient warehouse software to track inventory turns, or if they do, they don't utilize it to its maximum potential.
An efficient Inventory Management Software which streamlines purchases, material handling, and stock management is the key here. It should enforce appropriate authorization for purchases to reduce redundant and excess purchase orders. Slow moving stock should be identified and their re-order has to be managed effectively to reduce dead stock and stock reports should be taken and studied on a regular basis to study the pattern of sales and its impact on the inventory. In fact, the most crucial factor is learning to extract and manipulate data in the warehouse software program. In the best interest of the business preventing the accumulation of Dead stock in the inventory is the right approach, however the possibility of the existence of non-moving items in the stock cannot be nullified. So device the right strategy for effective Inventory management with the right technique for Dead Stock Sale also put in place. We explore more about this in our next blog - Effective Ways to Avoid and Handle Dead Stock