What is dead stock inventory and how do you avoid it?

Inventory you can’t sell becomes dead stock.

The longer these unpurchased products remain in warehouses, the more money companies spend keeping them in storage, and the more money they lose in untapped profit.

In this piece, we’ll break down the basics of dead stock, why it happens, why it’s a problem, and what it can cost your company.

But don’t worry — it’s not all bad news.

We’ll also offer tips to help you avoid dead stock, manage obsolete inventory, and reduce lost revenue.

Here’s what we’ll cover

What is dead stock?

Dead stock is any stored inventory you can’t sell immediately and likely won’t sell in the future. It’s also known as dead inventory or obsolete inventory.

There are several reasons stock may go from profitable to problematic.

For example, food or pharmaceutical products may go out of date, rendering them unsellable.

Products may be out-of-season or obsolete, or they may be of lower quality than items from competitors.

Any product you sell can become dead stock if it stops selling.

As a result, dead stock isn’t limited to a specific industry or market vertical; instead, it’s a natural consequence of evolving consumer demand.

Only unsold items count as dead stock. Products purchased and returned do not count toward dead stock totals.

Examples of dead stock

So what does dead stock look like?

Here are 3 examples:

1. Based on demand forecasting, a grocery store chain purchases 5,000 units of locally-grown blueberries. While initial sales are steady, customer demand drops off faster than expected, and 500 units expire, rendering them unsellable.
2. A clothing company stocks 1,000 winter coats, but the season is milder than expected. As a result, 300 coats are left in stock when spring arrives, rendering them unsellable until next winter—when customers will expect an updated version of the coat, not last year’s model.
3. Each year, a tool manufacturing company releases its newest power drill model. This year, the new version is ready earlier than expected and offers a significant boost in battery life. Even though they have 10,000 current-gen drills in stock, they start selling the new model. Sales of the previous power drill all but stop, leaving them with 5,000 units of dead stock.

Why does dead stock happen?

There are 8 common reasons for dead stock.

Excess ordering

With many supply chains still experiencing delays and shipping costs continuing to rise, it’s tempting for businesses to order more than they need.

The reasoning seems solid: unexpected delays that create stockouts could lead to lost business.

The challenge? Demand isn’t linear.

If consumer interest suddenly falls off or products are eclipsed by improved versions, excess inventory becomes dead stock.

Ideally, businesses should adopt a just-in-time inventory management approach that helps balance on-hand and incoming stock.

Poor demand forecasting

Demand forecasting is critical for any retail company.

How many people are currently buying your product? How often? What number of customers return for repeat purchases?

Using the data, businesses can create potential demand curves that inform product ordering.

If, however, demand forecasting relies on out-of-date information or doesn’t account for external factors such as economic conditions, the results may be predictions that don’t align with real-world outcomes, in turn leading to product shortages or dead inventory.

Ineffective marketing

In some cases, dead stock isn’t tied to inventory levels, product quality, or even consumer demand. Instead, it’s the result of ineffective sales, marketing, or both.

Consider a product that has demand and a short sales cycle—buyers want it, and they want it now.

If your demand forecasting is accurate but you find that conversions aren’t keeping pace, sales or marketing could be the culprit.

For example, if marketing teams aren’t connecting with customers—if buyers are using social platforms like Instagram or TikTok while brands are selling via email—the available pool of potential buyers shrinks significantly, leaving you with excess stock.

Poor user experience

Make it hard for customers to buy your products and they’ll go somewhere else.

If websites are slow, difficult to navigate, and don’t contain up-to-date information, potential conversions can turn into abandoned shopping carts.

While high-quality, high-demand products can help spur customer action, poor experiences can drive consumers to your competition.

The result?

Stock that should have sold takes up space on your shelf while customers shop elsewhere.

Low-quality products

Product quality issues can also lead to dead stock.

These issues may be tied to manufacturing defects, such as poor workmanship or shoddy construction.

They may also be tied to low-quality materials that impact the longevity and reliability of products.

In the best-case scenario, staff notice the issue before products are sold, leaving companies with dead stock but without reputation damage. In the worst case, products are sold to customers, leading to online complaints, item returns, and the possible loss of long-term revenue as buyers take their business elsewhere.

If product quality issues persist, it’s worth re-evaluating your relationship with materials suppliers or manufacturers.

Cancelled orders

Cancelled orders are hard to predict, but significantly increase your volume of dead stock.

Consider a company selling a popular new product. With 5,000 preorders already processed, they bring in enough stock to cover current orders and leave room for additional buyers.

Before the new stock arrives, however, a competitor releases an improved version of the same product, leading 4,000 customers to cancel their orders.

Suddenly, the business is holding a massive amount of dead stock.

Fluctuating lead times

While the shift to diversified supply chains has helped reduce the uncertainty of product lead times, delivery estimates are never guaranteed.

From issues with materials sourcing to large-scale weather events, there are a host of potential problems that can disrupt typical timelines.

If products don’t arrive when expected, this can lead to the short-term problem of order cancellations and the long-term issue of inconsistent inventory turnover, especially if items are seasonal.

The result?

Delayed inventory that arrives and goes directly into storage and becomes dead stock.

Backorder over-orders

Persistent problems with back ordered items can also lead to obsolete inventory.

Here’s how: in an effort to avoid stockouts, businesses may over-purchase popular products that are on backorder with suppliers.

By the time these items arrive, however, the sales window has closed and customers have moved on to a new product preference. What should have been an easy sale becomes dead inventory.

It’s worth noting that dead stock causes aren’t mutually exclusive.

For example, companies may order too much of a product based on inaccurate demand forecasting and also discover that quality isn’t up to expected standards.

Or, they may find that a well-selling product has been outpaced by a competitor option with more features or lower pricing.

How much dead stock is normal?

While there’s no hard-and-fast rule about how much dead stock a company should have, lower is always better.

Consider a 2023 survey by CNBC, which found that 20% of respondents’ excess inventory was not seasonable in nature—in other words, it was dead stock.

Ideally, dead stock should sit between 5% and 10% of your total inventory.

Due to the nature of supply and demand, however, this number is an average rather than an absolute.

This means it’s almost impossible to consistently maintain the same level of dead stock—if your business sells seasonable products or items that can expire, your dead stock naturally fluctuates.

Instead, you want to aim for average dead inventory levels of 5% to 10% over the course of a year.

For example, if 25% of your inventory is dead stock 3 months out of the year, but the remaining 9 months it’s just 3%, giving a yearly average of 8.5%.

What are the consequences of dead stock?

Dead stock carries several consequences, including:

Lost ROI

Dead inventory doesn’t make a profit but comes with a cost.

This means companies aren’t getting revenue on their investment—they’ve spent the money but have no way to recoup the loss.

The more dead stock on hand and the higher the sunk cost, the more money companies stand to lose.

Increased storage spending

Keeping dead stock in warehouses isn’t free.

If you’re using a third-party storage provider, you’re paying a monthly fee for that stock to keep taking up space.

The longer it stays, the more it costs.

Wasted resources

Managing dead stock also comes with resource costs.

For example, staff may need to regularly move dead stock to make room for new products, meaning time wasted that could be spent on other tasks.

Even getting rid of dead inventory requires resources—staff needs to spend hours sorting and removing dead stock, or you have to pay a service provider to remove and dispose of the product.

Limited inventory space

If you’re storing dead stock in your own warehouse, you won’t have as much room for new products that could help boost your revenue.

This is especially problematic if you sell seasonal items or high-value products that are tied to social media campaigns or word of mouth—while these products may fly off shelves in their first few weeks, demand quickly drops off. Less space means less opportunity for profit.

What is the cost of dead stock?

To understand the total costs of dead stock, you need 3 pieces of information:

1. The total value of your dead stock
2. The sunk cost of this stock
3. Your potential missed profit

To calculate the total value of dead stock, multiply the number of products on hand by the per-product price.

So, if you had 100 pieces of dead stock and each piece would have sold for $7, the value equation for dead stock is: 100 x $7 = $700.

Sunk costs are calculated by adding together everything you spent on acquiring products.

This includes raw materials, labor, transportation, and fees for storing dead inventory.

These costs vary by business and product type, but for the sake of our example, let’s say your sunk costs were $4 per unit.

The equation for sunk cost is: 100 x $4 = $400. These 2 numbers let us calculate your potential missed profit.

If you could have sold 100 products for $700 and the sunk cost of these products was $400, you simply subtract: $700 – $400 = $300 in missed profit.

How can you avoid dead stock?

While it’s impossible to entirely avoid dead stock—events beyond your control could lead to items that don’t sell or expire before they should—there are ways to avoid most inventory issues that focus on reduction rather than elimination of dead stock.

How to reduce dead stock

First, evaluate the current demand for products you regularly sell and set automatic reorder points.

This helps minimize kneejerk reactions to sudden market shifts while still ensuring you have enough inventory on hand.

For example, if you’re selling 1,000 units of product every 3 months, your reorder point should happen every 2 months (or so) to allow for possible production or shipping delays.

You should also build in some “safety stock” to your order. This means that if you’re selling 1,000 units per quarter, you might order 1,050 or 1,100 units to provide a buffer in case items are damaged in transport or demand suddenly surges.

Next, invest in demand forecasting tools that can combine historical and current sales data with market insights to help you understand how demand conditions will change over time.

The more accurate your demand forecasting, the closer you get to having the right amount of products on hand without ending up under- or over-stocked.

Key pieces of data here include average time to sale, daily and weekly number of orders, how current quarter demand compares to last quarter and last year, and how supply shortages or delivery delays may impact product availability.

Finally, you need an inventory management system that provides complete visibility into your product purchase, shipping, storage, and sales process.

Individually, each of these data sets provides a piece of the puzzle—together, they offer a big-picture view of evolving product demand, helping you create a supply and sales roadmap that reduces the risk of dead stock.

How do you manage dead stock?

If you find yourself with dead stock, there are several ways to recoup some of your sunk costs through effective dead stock management.

1. Change the channel

One way to move dead stock is by selling products through a different channel.

If items aren’t getting any traction in e-commerce stores, consider selling them at brick-and-mortar locations.

Third-party platforms are also an option.

For example, social media stores are a great way to sell products with limited demand windows. Specialty sites such as Etsy can help move higher-quality items.

If you have a large number of dead stock, meanwhile, online retailers such as Amazon are a good option.

2. Put stock on sale

Selling dead stock at a discount can help recoup some of your sunk costs, even if you don’t make a profit.

Consider the example above, which saw a business losing $300 on 100 units of dead stock after factoring $4 per-product sunk costs.

By selling dead inventory at $3 per unit—less than it costs to produce—businesses can break even.

3. Give out gifts

Another way to move dead stock is by giving it away for free.

Offer it as part of a social media sharing campaign, or give it to customers who sign up for your newsletter.

Gifts can help establish rapport and encourage customers to purchase from your brand in the future.

The caveat?

If quality is the issue with your stock, don’t give it away—this will have the opposite effect on customers.

4. Donate dead stock

You can also donate dead stock to local charities or non-profit groups.

Doing so can raise a company’s profile in the community and improve customers’ perception of your business. This, in turn, leads them to think of you first the next time they need to make a purchase.

5. Speak to your supplier

If quality issues are a persistent problem, it’s worth speaking with your supplier to pinpoint the issue.

Start by confirming that effective quality control measures are in place and that these directives are being followed.

Make it clear that high quality is a priority for sales.

If issues aren’t resolved, it’s worth looking for another supplier—while producers may be responsible for quality issues, it’s your business that suffers when customer conversions drop.

Final thoughts on dead stock

Dead stock leads to lost profit and increased costs.

Items that can’t be sold take up warehouse space. They also require time and effort to manage, and represent money spent that can’t be entirely recouped.

The bad news?

It’s impossible to completely avoid dead stock.

Despite best efforts, supply chain issues or demand fluctuations create conditions that lead to excess product inventory.

The good news?

With the right application of tools and tactics, your business can minimize both the total volume of dead stock and the impact of obsolete inventory on your bottom line.