When you operate in a competitive market, making savings on overheads wherever possible is important to improving your bottom line. In this article, we take a look at how efficient inventory management can help you significantly reduce costs and improve productivity.
The first and most important thing you should focus on is reducing the cost of your inventory. This enables you to make savings in areas that are already costing you significant sums of money. So what exactly are inventory-related costs?
Inventory-related costs are those accrued through holding and storing products for a certain period of time. The type of associated costs includes the following:
- Handling and transportation
By calculating the above, you can more accurately determine what your inventory costs are.
Now we’ll examine ten ways you can reduce them:
- Avoid Minimum Order Quantities (MOQs)
MOQs are generally offers made on products that are waning in demand so that manufacturers or suppliers can reduce their inventory costs. Generally, these offers are made to appear attractive like a “buy 50, get 10 free” deal although they should be viewed with caution if you want to keep your own inventory costs down. It’s a false economy to take on inventory that may not sell, no matter how good the deal is.
- Know Your Reorder Point
Most businesses that carry a lot of inventory keep an eye on their stock to that they always have products available to meet demand. By setting a reorder point in your inventory management strategy you can ensure that your fulfilment is always smooth-running. It is always damaging for a business to make customers wait or to risk not being able to fulfil their order at all so knowing yours reorder point will avoid any issues.
- Organize Your Warehouse
It’s crucial that you know where everything is in your warehouse and that it is maintained in an efficient order. This enables you to sort your stock so that orders can be fulfilled quickly and you can also keep an eye on what you have left. A disorganized warehouse is likely to add time to a lot of processes and as we all know; time is money.
- Get Rid of Obsolete Stock
It can actually be more expensive to keep hold of stock that is unpopular or there’s no demand for than it is to keep it on the off-chance it’ll sell in the future. Taking a regular inventory of your stock and seeing what products are no longer being purchased at great volume allows you to get rid of the clutter in your warehouse. You can always make bundle offers or bargain bucket deals to shift obsolete stock and if that doesn’t work, donate to charity for a tax write-off.
- Implement a Just-in-Time Inventory System
This method of inventory management is designed to keep warehouses stocked to a minimum and simply ordering from suppliers and manufacturers as and when you need to. This significantly reduces your inventory costs although it will require you to do the following:
- Form a good relationship with your suppliers
- Find a long-term supplier for each part you need to purchase
- Shorten the production cycle
- Separate repeating orders from one-stop customers
- Institute quality control
- Use Consignment Inventory
When retailers take consignment orders from you, it allows you to reduce your inventory costs by shifting stock from your warehouse to their premises. The only catch to this arrangement is that consignees don’t pay for the stock upfront as it is generally supplied on a sale or return basis. Nevertheless, there are still savings to be made by consigning goods to retailers that outweigh the delayed sales revenue.
- Reduce Your Lead Time
Shortening the time it takes to fulfil your purchase orders helps to reduce inventory costs in two ways:
- By allowing you to keep less “safety stock” which reduced the chances of obsolete inventory in the future
- By enabling you to make smaller orders more frequently so you can downsize and cut costs on your warehouse space
- Monitor Key Performance Indicators (KPIs)
KPIs are metrics that are used to help improve purchasing and production processes and ultimately the costs related to your inventory. You can do this by tracking your inventory so that you know the demand levels for everything you sell. By looking at the figures you create, you can see the products that are most in demand and those that are declining in popularity. You can also see trends emerging that allow you to make important decisions about how to move your business forward and keep the customers coming.
- Use a Perpetual Inventory System
A perpetual inventory system allows you to track your stock in real-time so that you are able to reorder when you need to. Some businesses schedule periodic stock or inventory checks but this can sometimes be inaccurate. The bigger a company is the more staff there is involved in inventory management both in the warehouse and admin and finance departments. Perpetual inventory management is a more reliable method that ensures human errors are quickly picked up on.
- Use Accurate Forecasts
When you monitor your inventory with the perpetual management system it allows you to keep an eye on which direction your business should go. You can quickly identify the products that are best-sellers and those that are falling by the wayside and respond accordingly. Some businesses have a policy of running their stock to empty even if demand for their products has fallen. This is often because they have failed to keep track of their inventory.
Creating a structured inventory strategy will ensure you keep costs down and will also improve productivity. Sound inventory management makes your business proactive with your customers so that you are always hitting their sweet spot with your products. Customers always return to suppliers who fulfilled their orders quickly and efficiently and so it makes sense to your profit margins to streamline your inventory management.