The best way to reduce your inventory costs

By definition, the inventory includes any asset that a business purchases or processes in order to produce and/or sell goods and services. All entrepreneurs know that besides the employees, inventory is one of the most important and critical assets and a good inventory management is fundamental for a sustainable business growth.

Keeping inventory costs down means competing in your (often overcrowded) industry with a significant advantage: however, this is not an easy-to-reach goal.

The first rule: know your inventory

Yes, this is not taken for granted. Tracking properly the inventory and its costs is mandatory and a lot of businesses still use spreadsheets and papers to manage their products. Not investing in technology is a point of failure for them.

Companies need to accurately track what they have in inventory and how much it costs to them: they have to count everything in stock and monitor real-time everything happens there. This is the only way the understand the stock value and estimate the inventory costs.

When it comes to inventory costs, we have to consider many components: storing inventory takes up space, having products sit in a warehouse has a cost, if you have perishable goods you need additional requirements to store your products and all they have a cost.

That’s why a common strategy is “Keep as little inventory as possible”. Ok, but how little?

Inventory Costs

The second rule: optimize your inventory

Properly managing and optimizing your inventory starts with the right information: you need exhaustive analysis of your products, their past sales, and an accurate demand forecasting in order to know something more (reliable) about your business forthcoming trends.

You need to sell products when your customers are ready to buy. Of course, you have to store only the items they will buy and the right amount for staying ahead of the demand. So the first point is saving money by not ordering inventory that you will not sell and stocking enough of the profitable products that meet customer demands. Simply plan your inventory budget according to the insights coming from a demand forecasting report, this is the best practice for fighting against your profit’s enemies: lost sales and excess inventory.

Free up space in your warehouse by getting rid of unnecessary merchandise: once you identify your unsellable/unsold/obsolete products, offer customers a promotional sale on them. Then, you’ll be ready for your new purchase orders: decide how much of a product you should buy according to the actual stock on hand/on order, the days of sales (get this information from your forecasts report) you want to cover with your order and the lead time coming from your suppliers delivery tasks.

Finally, pay attention to the volatility of the market and of …. your inventory. You absolutely need to set up reorder alerts in order to avoid running out of your popular items. Set up a service level and a safety stock and configure your inventory management tool in order to alert you when it’s time to issue a new purchase order. Be aware of your suppliers lead time, it can change during the year. Plan in advance if you want to prevent lost sales during the seasonality peaks (holidays, summer, Christmas): be sure that you’ll have stock enough to satisfy the future demand, anticipate your orders if necessary and beat the competition when customers will knock on your store door.

Learn more on Demand Forecasting

September 14, 2017 - intuendi