Dead Stocks

We are probably all familiar with aged stocks. Those items that appear way down the right hand side of the aged inventory register are generally there for a reason .. slow moving, obsolete, or simply forgotten about in the pace of day to day business.

So what then is a dead stock ? It is best explained with a diagram.

In this simple example assuming constant demand and periodic purchasing, the dead stock component is that part of stock that is never consumed. It represents waste.

I only have metrics from my own experience but in my view it would not be unusual for 1/3 of inventory to be classed as 'dead stock' over a typical 3 month period.

Dead Stock vs Aged Stock

Most if not all aged stock is dead stock, however, not all dead stock is aged. This distinction is important. In the above diagram for example it is clear that the stock is not aged, in fact it turns over approximately once per month. Therefore it will never show up on an aged stock report. The fact that it is turning over quickly means that it can be fixed relatively quickly.

Dead stock management is therefore a very effective way to reduce inventory in the short term.

Identifying Dead Stock

Aged stocks by their nature are relatively easy to identify (using an aged stock report or aged inventory trial balance), but typically can be challenging to fix. If the material is slow moving, then it will take some time to run it out. If the material is obsolete, then the activity of reworking, writing off, or otherwise disposing of it can take some time and generate cost.

Dead stocks on the other hand can be difficult to identify, but the fast moving dead stocks by their nature can be fixed relatively quickly.

For SAP users there is a transaction called MC50 "Dead Stock Report" that quickly identifies dead stocks. Run at a plant level, or even for a list of materials, the report will rank dead stock balances over the specified time period. Over longer time periods expect the dead stock balance to be smaller than over short time periods because over a longer time period there is a greater probability that the stock will have run lower than over a short period.

Ive included a snapshot of the SAP MC50 transaction below. A tip for optimising the performance of the report is to run it from values 1 to 99999999, rather than unbounded.

Reducing Dead Stock Balances

Reducing the dead stock balance comes down to planning and process control. If your purchasing and or planning processes are highly automated, the remedies tend to revolve around forecasts, safety stocks, lead times, re-order points, and re-order quantities which can be easily maintained.

The MC50 Dead Stock report will automatically rank your dead stocks from highest to lowest. You can export the data into an excel spreadsheet to create a Pareto Chart similar to the one below.

In this example, there are a total of 61 materials in inventory for this product group. In fact, when I compared the dead stock balance to the inventory balance, 62% of the total inventory was dead over the last 3 months !

Looking at the above chart, 50% of total dead stocks are made up of just 10 materials. What this means is that I can reduce total inventory for the product group by 1/3 if I just fix the dead stock balances on 10 items. When the problem is broken down like that it doesnt seem so difficult any more.

I can break the problem down into 10 material level strategies, and solve them all one by one or simultaneously.

Viewing the inventory history

SAP has a neat functionality built into the Dead Stock report whereby you can view a graphical summary of the dead stocks over time.

Run the dead stock report, and place the cursor on one of the material numbers. From the top menu buttons, click on 'Detailed Display'. You will see a pop up window with a number of options, and you can jump from these options to a number of screens. Click on 'Stock Level' and hit the green tick.

This is a great tool for getting a quick feel for a material inventory. In the above example we can see that back in 2007 we had an overzealous purchasing officer who brought in way too much of this material, and in the years since then we have fine tuned our purchasing and forecasting in order to manage it a bit better. Over most of 2010, however, most of the stock has fallen dead yet we have still brought more in. In this instance I would be looking at the forecast accuracy on this material, with a view toward reducing the safety stock. As you can see though, the material turns fairly regularly, and therefore is unlikely to appear on our ageing reports.