How to spot dead stock and clear it before it eats your cash

You spot dead stock with two numbers: how long an item has gone without a sale, and how many weeks your current stock would last at today's sales rate. If something hasn't sold in 90 days, or you're holding more than six months of it, it goes on your list. Then work through three steps: move it, mark it down, get it out.

The catch is that dead stock is quiet. A sold-out item gets noticed because customers ask for it. An item that's sat on a shelf since spring gets noticed by no one. That's why it gets expensive.

Why dead stock costs you money

The 19 mint-green stoneware mugs that haven't sold since April cost you €9 each. That's €171 on a shelf instead of in your account. Then there's the cost of holding it: textbooks often put that at 20 to 30 percent of stock value a year. High for a small shop, but even half of it is real money.

The biggest cost is space. A metre of shelving holding dead stock is a metre not holding your bestsellers. And olive oil, tea and cosmetics have a date on them, while homeware and fashion have an invisible one: the day they start looking old.

Three signals

Days since last sale. For core range, 60 to 90 days without a sale is a warning. For gifts or pricier ceramics, 120 to 180 days. For fashion and seasonal lines, four weeks is already long. Set the threshold per category, not once for the whole shop.

Weeks of cover. Stock on hand divided by average weekly sales over the last 8 to 12 weeks. An olive oil with 60 bottles selling 2 a week has 30 weeks of cover. It sells, but you've got seven months of cash in an item you could reorder every four weeks. Past 26 weeks something's usually off. Past 52, the item is effectively dead.

Sell-through. For stock you buy once: what share has sold? 12 of 40 Christmas mugs gone by late November is 30 percent with four weeks of season left. Act now, not in January.

Finding the candidates

Export item, stock on hand, cost price and units sold in the last 90 days from your till. Work out cash tied up and weeks of cover:

Sort by cash tied up, not units. The candle still sells, but it ties up more than the dead mugs, so it's the bigger win. The tote is healthy. Leave it alone.

Do this once a month. The first list is long. After a few months it's short, because you're catching things earlier.

Clearing it in four steps

Don't jump straight to 50 percent off. Give each step three or four weeks.

Move it. Plenty of items sell badly because they're badly placed. Researchers at the University of Chicago tested this in supermarkets: where a product sat on the shelf had a big effect on sales, while adding more units side by side did little (Drèze, Hoch & Purk, 1994). So: candles by the till, mugs next to the coffee. Costs nothing.

Gentle markdown. 20 to 30 percent off. On typical margins you still make a little or break even.

Bundle or deep markdown. Two free mugs with any bag of coffee over €20 beats 19 mugs sitting for another year.

Out. Whatever's left no longer belongs in your shop. How to still get some money back is in Sell it, give it away, write it off.

Stopping it at the buying stage

Dead stock is almost always created when you order, because the quantity didn't match demand. Order new lines small: two orders of 12 beat one of 36. A study at a skiwear maker shows how much this can matter: committing only part of the season up front and making the rest after the first sales came in raised profits by 60% compared with their previous, informal approach (Fisher & Raman, 1996). A manufacturer isn't a shop, but the idea scales down: see how it sells, then reorder. Order from sales, not instinct, as explained in How much stock does your shop need?. And ask new suppliers about swaps.

Every shop makes buying mistakes. The difference is whether you notice after three months or after twelve.

Sources

• Drèze, X., Hoch, S. J. & Purk, M. E. (1994): Shelf Management and Space Elasticity. Journal of Retailing 70(4).
• Fisher, M. & Raman, A. (1996): Reducing the Cost of Demand Uncertainty Through Accurate Response to Early Sales. Operations Research 44(1).