Carrying lower volumes of excess inventory in your supply chain can lead to lower carrying costs, such as reduced storage costs and inventory service costs. With less working capital tied-up in goods sitting in the warehouse, businesses will also have more money to invest in fast-selling lines or other areas of the business. If excess inventory is managed effectively and stock levels are reduced, this can prevent an accumulation of obsolete stock which often has to be sold at a discounted price or even written off.
It also helps keep cash flow healthy and has a positive impact on your end of year accounts! Any organization looking to lower costs across their supply chain and improve profit margins should therefore start by taking a closer look at how to reduce their stock levels.
However, simply cutting inventory across your entire product range is not the approach to take. Instead, here are five strategic inventory reduction methods that are certain to drive cost savings. While these stats will vary to some degree, this is the theory behind ABC inventory analysis — a model that can be used to categorize your stock. Using ABC analysis, you can classify your inventory items into three groups based on their value to the business.
A items are the most important in terms of the value they bring to your company, while C items are the least valuable.
You can then prioritize the stock you carry, focusing on your A items to ensure better availability, rather than B and C. This could include reviewing their demand forecasts more frequently or interacting more regularly with suppliers to improve lead times.
A tool like EazyStock will prioritize which inventory items to carry, based on multi-dimensional criteria, such as demand types, pick frequency, demand volatility and cost to sell or profitability.
It will dynamically set stocking policies and adjust reordering parameters for every item in your warehouse. This makes it much easier to achieve high rates of order fulfillment or service levels without carrying large volumes of every inventory item.
So reducing overall inventory costs is a great way to free up and reallocate capital. Managing inventory is costly. Paying for warehousing, accounting for breakage, shrinkage, and quality control as well as other inventory costs can be expensive — especially when adding more products and new collections to your growing business. You might be wondering what costs incur when adding more products and new collections.
Purchasing costs. How much are your suppliers charging you? If you are selling internationally, how much do you spend on customs, tariffs, and taxes? Carrying costs. How much do warehouses cost your business? This includes renting the storage space, paying for staff wages, and utility charges. Shortage costs. How much does it cost when an item unexpectedly goes out of stock?
You may have to pay a premium on shipping and delivery to get your item to the customer on time. SMEs that are experiencing hyper-growth for the first time can be caught off guard by snowballing inventory costs.
Understanding the right time to reorder products and the right volume at which to do so is an easy way to make sure that you are not holding more inventory than you can sell or having too little stock to fulfill demand.
One way to determine your reorder points is to use a demand forecasting tool. Look at the sales data over the past few years, factoring in seasonality, geography, and what channels customers most often purchased on.
By reducing inventory and getting it turned over quickly, you can move merchandise around and keep fresh products rotating on a regular basis. The more new displays and products customers see when they stop in to browse, the more likely they are to continue to come back and spend money routinely. When you only carry the inventory necessary to meet near-term customer demand, you free up working capital to invest in other business needs.
Needed building and equipment repairs, renovations of stores and research and development are examples of areas where you could invest money saved by not over spending on inventory.
Prioritizing where to put money in the short-term to drive business growth is key to getting the ball rolling toward long-term financial success.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since At its core, inventory is an investment. While theft might be the most obvious criminal activity to try and prevent, fraud and dishonest employees can pose a serious threat, as well.
And that all goes without mentioning the intricacies of generating reports, cutting out fraud, and identifying when products have gone missing. Another common misconception is that you can manage your inventory after your business launches.
Say your company makes its debut, and then decides to onboard an inventory management platform — the problem at this point is that your inventory has already had a chance to become disorganized and potentially hurt your bottom line.
The essence of any successful business centers on change and innovation. Some companies falsely presume they can predict future sales using just their previous sales data. By utilizing advanced inventory management software, brands can improve the precision of their sales forecasts while also tracking other pertinent KPIs. Opting to restrict order placements and inventory tracking to a select handful of employees can be an extremely limiting and counterproductive practice.
The same principles can be applied to business. The goal of every retailer — regardless of their size or business model — should always be to meet customer demand. Advanced software solutions are the answer to eliminating human errors and making sure your operations run as smoothly as possible.
Software and management tools are pivotal for businesses who are looking to scale, since software automates your inventory and takes that hard work off your to-do list.
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