Retail businesses often find their stockrooms and warehouses slowly filling up with products they can’t sell. That includes items like last season’s clothes, toys from a kids’ movie that flopped, or old electronics since replaced by newer models. This unsold merchandise, or dead stock, takes up valuable storage space and ties up cash in products that don’t generate enough—or any—revenue.
Sometimes slow-moving inventory accumulates when a retailer misjudges demand and orders too much. Other times, strong initial sales peter out faster than expected. Seasonal inventory, like holiday decorations and beach gear, can languish for months once its selling season passes. This article will explore the financial implications of slow-moving inventory and strategies retailers can use to minimize and manage it.
What is slow-moving inventory?
Slow-moving inventory refers to products that have been in a retailer’s stock for an extended period of time without selling. This unused stock takes up warehouse space and requires handling and storage, leading to rising inventory costs. Slow-moving inventory also represents an investment of capital frozen in unproductive assets rather than being put to more profitable uses.
Why is slow-moving inventory a problem?
- Ties up capital
- Increases storage and handling costs
- Leads to discounting
- Occupies valuable retail space
- Results in stock obsolescence
Slow-moving inventory lingers unsold for extended periods, straining the finances and operations of a business. Here’s why slow-moving inventory is an issue for retailers:
Ties up capital
Slow-moving inventory locks up cash in products sitting on shelves instead of having that capital available for more productive uses like funding new inventory purchases, marketing efforts, capital investments, or innovation. For a retailer, investing excessive capital in slow-moving products limits financial flexibility and stymies growth.
Increases storage and handling costs
Warehousing slow-moving inventory incurs storage, rent, labor, insurance, and other handling expenses that erode profit margins. The longer slow-moving stock sits, the more these inventory carrying costs add up and eat into earnings. Storage fees can also quickly diminish profit for online sellers using third-party fulfillment services.
Leads to discounting
Retailers often mark down prices or offer promotions—like buy one, get one free and flash sales—to convert slow-moving items into sales. These markdowns reduce gross profit margins. Daily deal companies, like Groupon, offer significant discounts on slow-moving local deals to attract buyers. Luxury apparel that doesn’t sell at full price may be marked down, destroying profitability.
Occupies valuable retail space
On retail shelves, slow-moving products take up space that could instead display trending or hot commodity items likely to sell faster. Removing slow-moving inventory makes room to offer customersmore value and generate greater sales volume from goods in higher demand. The shelf space occupied by slow movers represents lost sales opportunities.
Results in stock obsolescence
Inventory that sits too long risks becoming obsolete, dated, expired, or even spoiled in the case of food and perishables. This leads to obsolete inventory. Obsolete stock has to be disposed of or sold at deeply discounted prices.
How to identify slow-moving inventory
Pinpointing slow-moving inventory is essential for maintaining efficient inventory levels and making the best use of warehouse space. Here are a few ways to identify slow-moving inventory:
- Analyze sales data patterns. Review sales records to detect items with consistently low sales figures over several accounting periods.
- Track stock age. Regularly monitor how long items have been in inventory taking up warehouse space, focusing on those that exceed the typical sales cycle for their category.
- Review seasonal trends. Evaluate product performance across different seasons or specific sales periods to identify items that underperform during expected peak demand times.
- Conduct customer feedback analysis. Gather and analyze customer feedback to identify less popular products.
How to minimize slow-moving inventory
- Implement an inventory management system
- Regularly calculate inventory turnover
- Fine-tune demand forecasting
- Improve cost management
- Monitor unit purchase price trends
- Address slow-moving inventory with strategic moves
Minimizing slow-moving inventory is essential for businesses to maintain positive cash flow. Through strategic planning and regular review of inventory metrics, retailers can prevent the accumulation of overstocked items that tie up business capital.
1. Implement an inventory management system
Inventory management software systematically tracks inventory movements and provides actionable insights. By using this type of software system, retailers can easily spot slow-moving inventory based on sales velocity and duration on the shelf. This data is crucial for recognizing stock that may require promotional efforts or retail markdowns to move.
Ecommerce platforms like Shopify offer inventory management tools that give retailers insights into product availability, providing low stock alerts and key metrics reports, including sell-through rate.
2. Regularly calculate inventory turnover
Calculating the inventory turnover ratio is helpful for identifying slow-moving inventory items. This ratio compares the cost of goods sold (COGs) to average inventory. Calculate the inventory turnover ratio with the following formula:
Cost of goods sold (COGS) / Average inventory
- Cost of goods sold (COGS): This is the total cost of all inventory sold during the period, usually a year or a quarter. COGS includes direct production and manufacturing costs, excluding indirect expenses like distribution and marketing.
- Average inventory: This is derived by adding the beginning inventory and ending inventory for the relevant period, then dividing the total by two.
A low inventory turnover ratio suggests that a company is struggling to sell its inventory, leading to overstocking and higher holding costs.
3. Fine-tune demand forecasting
Accurate demand forecasting allows businesses to order stock in line with customer demand, avoiding excess inventory. By analyzing historical sales data, seasonal trends, and market changes, retailers can predict future sales and adjust their orders accordingly. This ensures that inventory carrying costs don’t outweigh the value of inventory on hand. This forward-looking approach maintains a healthy inventory turnover ratio and prevents slow-moving inventory accumulation.
4. Improve cost management
Effective cost management involves reviewing both the per-unit purchase price and the holding costs associated with carrying stock. Businesses must scrutinize their shipping costs, carrying costs, and the implications of aged inventory on financial performance to develop a cost-efficient strategy for ordering and maintaining inventory.
5. Monitor unit purchase price trends
Observing changes in retail unit purchase prices over time can indicate how an item is performing. Slow-moving inventory often has a stagnant or falling unit sales price, reflecting low volume and consumer demand. By tracking price trends, retailers can identify which items don’t contribute to cash flow and adjust product procurement accordingly.
6. Address slow-moving inventory with strategic moves
Once you have identified slow-moving inventory, take immediate steps to address it. You might reduce the price for quick sale and offer better shipping rates to make these items more attractive to customers.
You also can turn to online seller platforms, or sell at a deep discount to a liquidation company.
Slow-moving inventory FAQ
What is inventory that is not moving?
Inventory that is not moving refers to stock that remains unsold for an extended period, exceeding the typical sales cycle for that particular product.
What is the cause of slow-moving inventory?
Slow-moving inventory is often caused by overestimating consumer demand, changing market trends, or purchasing more stock than can be sold within a reasonable timeframe.