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Aged Inventory: Report, Formula & Ways To Reduce Aged Stock
In this article:
Staying in stock is the goal. But not if that means never selling through your products. When that happens, you’re left with aged inventory.
Aged inventory ties up cash and takes up pivotal warehouse space. And the longer these items sit, the more expensive it gets.
Luckily, ecommerce brands can track aging inventory and take proactive measures before this inventory wrecks your margins. Plus, with the right processes, you can even avoid the issue altogether. Here’s how.
Aged inventory refers to low-demand products that sell slowly or don’t sell at all. These items are problematic for retail brands’ financial health because they tie up working capital in unsold merchandise and collect expensive carrying costs that shrink profit margins.
An aged inventory report (aged stock report) is a financial report that measures the average number of days inventory sits unsold in your warehouse. An aging inventory report is used to identify slower-moving SKUs and build strategies to increase the inventory turnover ratio and reduce dead stock.
Typically, aged stock reports are relatively simple and list:
You can generate these reports manually using spreadsheets and routine inventory audits. However, this approach is tedious, time-consuming, and prone to human errors. So, top retail brands use inventory management software or ops optimization tools like Cogsy to automatically generate aged inventory reports in real-time.
Knowing the age of your inventory empowers you to make smart buying decisions and protect your brand’s bottom line. Here’s how analyzing the aged inventory report helps you.
When you regularly run an aging inventory report, you can identify which products turnover slowly and which aren’t selling.
This empowers you to get ahead of the problem before those products turn into dead stock. How? By discounting the SKU, adding it to product bundles, or completely re-marketing the aging inventory items.
Knowing your stock’s age provides valuable insights into your customers’ demand. And you can use these insights to build more accurate inventory plans based on what customers actually want (or don’t want).
For instance, say an SKU turns over super fast. That means demand is high, and you might want to order a bit more safety stock to avoid a stockout situation. Meanwhile, if you don’t sell a ton of SKU, then demand is low. So, you don’t want to order a ton more of that item, only for it to turn into dead stock.
Knowledge is power, so they say. And knowing your stock age is no different.
Knowing which of your items are slow-moving or unsellable, you’re empowered to make informed decisions to increase demand for those items (and subsequently increase your revenue).
This might mean marketing those slow-moving items to a new audience, bundling them with more popular SKUs, or discounting their retail price.
Inventory that just sits in your warehouses ties up working capital and racks up holding costs. And ultimately, it slows down your cash flow.
Think about it: Couldn’t that working capital be put to better use in another part of your business? Like acquiring new customers, testing a new channel, or developing new products.
But if it’s already been invested in inventory, you have to wait until that inventory sells. But if it’s not selling…
By identifying aging inventory, you can prevent tying up more capital in slow-moving SKUs. Or maybe even unclog cash flow by eliminating unsellable products from your offerings.
An aged inventory report helps brands identify inventory inefficiencies before they become bigger issues.
For example, a product might not sell well because of quality issues. But the brand won’t know until they identify that the inventory is aging longer than other SKUs.
Meanwhile, brands that run stock age reports likely will identify this quality problem. And they can switch suppliers before overstocking damaged goods or redesign a higher-quality version of the product. That way, they’re not stuck accumulating carrying costs that’ll wreck margins and lower their gross profits.
To calculate your stock age, use the average age of inventory formula:
average age of inventory = (average inventory cost / cost of goods sold ) x 365 days
In this formula:
For example, if a company’s average inventory cost is $100,000 and its COGS for that inventory is $500,000, the average inventory age would be 73 days.
Average inventory age = ($100,000 average inventory cost / $500,000 COGS) x 365 days = 73 days
The higher your average inventory age is, the longer it takes to sell through product, and the higher your holding costs will be. Meanwhile, the lower this number is, the higher your demand and the more diligent you need to be about reordering in time to avoid a stockout.
Understanding the average age of your inventory helps business owners identify low-performing SKUs, better predict customer demand, and lose less capital to the wrong products. But only if they use that information to reduce their aging inventory. Here’s how you can do that.
With inventory management metrics like aging inventory, you keep a pulse on which SKUs you have too much of or aren’t selling quickly. And you don’t buy more of those items, racking up holding costs. But you need to communicate this decision to your purchasing and warehouse management teams.
That way, your purchasing team doesn’t unknowingly reorder more of that item number. And your warehouse management team knows that more inventory isn’t on its way, and they can use that space for other products (this small gesture can seriously improve your fulfillment relationships).
Routine inventory audits ensure your stock records match what’s actually sitting in your warehouse. Not only does this improve inventory accuracy, but it can provide visibility into what stock items aren’t moving (leading to better inventory control).
This way, you know which SKUs perform well and which ones are not. From there, you can decide how to reduce (or eliminate) the low-demand inventory – like by hosting a marketing event to increase demand for your product.
When SKUs aren’t selling, there’s probably a good reason why. Common causes include seasonality, website placement, or changing consumer trends.
Understanding the cause empowers you to make smarter inventory management decisions. For instance, you might adjust your purchasing decisions or marketing promotions to shed the excess aged inventory.
Inaccurate demand forecasting is the #1 reason for aging inventory — especially when you wrongly assume a slow-moving SKU is more popular than it is. But when you make operational plans using real-time, synchronized data, you can make smarter inventory purchases.
For instance, Cogsy keeps a 24/7 eye on your inventory. So, as soon as product demand drops, the tool adjusts your inventory plan accordingly. That way, you’re not reordering products that won’t sell.
No brand perfectly avoids inventory aging. So, how can you get rid of the slow-moving stock before it’s too late?
Running a marketing promotion is the most common way to eliminate aging stock. This includes strategies like discounting the SKU temporarily, bundling the item with top-performers, or (if you’re discontinuing the item) putting it on clearance.
Take Wayfair, for example. The online furniture retailer sells thousands of SKUs — many of which are seasonal. And after its season, those SKUs quickly become aged inventory.
So, the furniture dealer offers an annual warehouse clearout sale. During the event, aging inventory sells for up to 70% off before being discontinued. To further entice buyers, they even call out that the items are in “short supply” in the advert.
Source:
Wayfair
Of course, 70% off is an extreme example. One that likely ends in a loss for Wayfair. So, why do they run these promotions? Because making something off these products is better than not making anything at all – especially when the longer these items sit unsold, the more expensive they become.
The product detail page (PDP) is the lifeblood of your store. The page’s photos, description, location, and more all influence whether someone converts.
So, if a product isn’t selling well, consider making small tweaks to its product page. For instance, you might try:
Cross-selling invites customers to buy complementary products based on the items they’ve looked at or put in their cart. And cross-selling is proven to increase sales by 20%. This makes it a great strategy to get rid of your aging inventory.
Take Parade, for example. When customers look at their cart, the DTC underwear brand prompts them to “fill their drawer.” The company then recommends 4 other items the customer might also be interested in. However, unlike most underwear brands that recommend buying “more of the same,” Parade prioritizes limited-edition drops to prevent the inventory from aging.
Source:
Parade
Similarly, Dollar Shave Club sends subscription customers, prompting them to “toss more in” before their refill ships. This cross-selling technique allows the razor brand to promote less-popular items as package add-ons. And hopefully, eliminate some slow-moving SKUs by marketing them to already loyal customers.
Some suppliers allow brands to return excess stock within specific periods. So, check your contract terms for your vendor’s return process. Send the aged stock back if you’re still within those term limits.
If not, you can always donate that inventory to charity for a tax deduction if all else fails. For one, this can lead to good PR compared to simply writing off the items as dead stock. But plenty of organizations would also really benefit from your donations.
If you are outside the return data and the product is not donateable, you can get rid of the aged inventory by:
Even better than getting rid of aged inventory? Not overstocking on slow-moving SKUs in the first place. Admittedly, this is a bit of a challenge for retail brands. But luckily, Cogsy can help!
Cogsy is an ops optimization tool that empowers you to operate smarter and unlock revenue growth. How so? By your static inventory data into:
An inventory aging analysis calculates how long inventory sits unsold in your warehouse. Brands use aging analysis reports to identify slow-moving products, then implement strategies to increase inventory turnover and prevent those items from turning into costly dead stock.
Aged inventory is bad because the longer it sits, the more costly holding it becomes. These carrying costs shrink the product’s margins and, if aged long enough, can make the item unprofitable when it finally sells. Not to mention that the longer an item sits unsold, the more likely it is to turn into obsolete inventory.
Retail brands can reduce aging inventory by discounting the SKU, bundling the product with bestsellers, or (if all else fails) donating the excess inventory to charity. But the better operational strategy is to avoid aged stock in the first place by performing regular inventory audits, investigating changes in demand, and improving their demand forecasts.
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