Last Updated on
Inventory reduction strategies can help you to reign in costs. The objective of inventory management is to minimize the cost of holding inventory. Taking the right steps to reducing inventories can help you to more efficiently manage your inventory.
Of course, many managers struggle with how to reduce inventory. There are right ways to reduce inventories and wrong ways to reduce inventory. It is a balancing act between reducing inventory costs and having the inventory you need on hand.
- 1 Let’s Get Started by Understanding Why Reducing Inventory Is Important
- 2 How Do You Know If You Are Overstocked on Inventory?
- 3 What Are the Benefits to Reducing Inventory?
- 4 What Are Inventory Buffers?
- 5 Avoiding the Excess Cushion
- 6 Use a Classification System
- 7 Centralizing Your Warehousing
- 8 Make Customer Service Your Priority
Let’s Get Started by Understanding Why Reducing Inventory Is Important
Inventory management has one goal, to have enough inventory on hand to make sure you can meet your customers needs while making sure you are maintaining cost effectiveness. Inventory is there to meet customer demand.
There are several reasons why reducing inventory is valuable to your organization including:
- Save costs, including warehousing costs.
- Decrease your profit loss.
- Free up revenue to be applied to other areas of your business.
Consider the adage “never keep all your eggs in one basket” and apply it to your inventory. If you are trying to build your business, you never want to invest all your revenue into any one area. Overinvesting in inventory put the rest of your business at risk.
How Do You Know If You Are Overstocked on Inventory?
There are several signs to look for when it comes to whether you have too much inventory on hand and you need to get on board with inventory reduction strategies. One of the biggest red flags that you are oversaturated with inventory is that a large percentage of your inventory becomes outdated or obsolete before it is sold off.
Another sign is that your inventory is accumulating at rapid rates and you are running out of room in the warehouse. Often incorrect forecasting about consumer demand can leave you holding the bag with shelves of unsold inventory.
One other sign that you need to formulate a new inventory strategy to reduce is when your balance sheets are unbalanced. When you have more money going out for inventory than you do have coming in from customers, it is time to renegotiate your inventory strategy.
What Are the Benefits to Reducing Inventory?
The most obvious benefit of reducing inventory is reducing inflated costs for storage, material handling, labor costs, and other costs associated with managing the inventory. The costs can quickly add up when you are hanging on to unused inventory.
If you can reduce inventory costs you can also reign in the cost of space, labor, material handling, and you will have more money to allocate to other areas of your business. Lower inventory levels make processes easier across the board.
Savings is always a great motivator but that is not the only thing you can gain from reducing inventory. Reducing inventory will help you to remain more flexible. Technology is moving faster than ever, which means product lifecycles are moving faster then ever and becoming shorter.
Overstocking inventory can leave your business obsolete in a very short time. Reduced inventory based on product lifecycles will help your business to thrive and succeed. Not only are product lifecycles changing but so is the way consumers shop.
As brick and mortar stores become the second favorite way to shop and online shopping becomes the favorite way to shop. This shift in consumerism means that you need to have the cash on hand and not tied up in your inventory to find ways to accommodate consumers like building a website, online marketing, and more.
With inventory reduction strategies that include ordering inventory on a stricter as needed model, you can have the cash on hand to ebb and flow with consumer need and demands. It is important that your business remains flexible, and that takes money.
Waste reduction is another strong selling point for inventory reduction. Inventory that just sits in the warehouse is a waste of time, effort, and money. A lot of businesses will take the step of drastically reducing the price of the excess inventory they have on hand just to break even. Unfortunately, this can be bad for your business. Sure, you will get rid of the inventory, but you will also devalue your business and train consumers to expect these deep discounts.
Discounted inventory can be a quick way to teach consumers that this is what your inventory is worth. It can be hard to convince consumers to pay more than they did the last time for products from your business.
Of course, perishable inventory goes to waste right before your eyes if you are not careful. What do you do with perishable goods that have perished? You throw them out of course, which is bad for the environment, bad for your business reputation, and bad for your balance sheet. Keeping inventory levels low decreases, the chance of a stock out.
Reducing inventory will cut back on the waste and keep you from devaluing your company.
What Are Inventory Buffers?
Inventory buffers are the important first step in controlling your inventory. It is a preemptive step that will help you with reducing inventory moving forward. You set the buffers along the supply chain to help reduce risks when it comes to inventory ordering.
They are an important aspect of effectively managing your inventory. Buffers are inventory that you keep on hand just in case there are fluctuations in the supply chain. Although inventories are maintained, the goal of lean operations is to minimize safety stock.
You do want to maintain a safety stock, but you do not want to overdo these buffers. Safety stock can help to reduce uncertainty’s in the supply chain. Following some simple steps can help you to build a safety stock, reduce costs, and remove some of the risk of uncertainty.
The first step is to evaluate your supply chain. You should evaluate for high costs along the supply chain, and instability. For example, evaluate for poor quality, consistent late delivery issues, unstable production history, poor forecasting, and unreliability in other areas.
In other words, do not except poor performance in your supply chain. If you need to switch things around, switch them around. There is no reason that you must have an excess of stock on hand to compensate for potential problems in your supply chain.
A streamlined supply chain can help you to reduce inventory, speed up processing times, reduce costs, and free up your cash flow. Effective inventory reduction starts with getting your supply chain in order.
Avoiding the Excess Cushion
While it is true many businesses wind up with too much inventory because it can be very hard to predict consumer demean. Safety stock is that extra cushion of stock that is purchased to avoid the stock out, however, it can be easy to fall into the overstocking cycle.
The need for safety stocks can be reduced by an operations strategy which:
- Use fewer vendors. This takes a little work but building a relationship with a trusted supply base can pay off handsomely. This focused approach to supply chain management allows you and your vendors to work together to reduce costs, improve delivery, increase efficiency and ultimately reduce the need for excess inventory cushions.
- Use your negotiation skills. Forecasting does not become any easier when you become a better communicator with your vendors, but it does give you the opportunity to manage your inventory needs better. You can negotiate with suppliers to reduce order quantities, increase ordering flexibility, and keep you from having piles of unused inventory in the warehouse.
- Reduce product lifecycles. Changing inventory frequently gets consumers excited to see what is coming. Offering inventory in limited supply will pique the interest of your audience and will also make your products seem more exclusive. Expand the type of inventory you are selling and do it in smaller quantities. This is a simple trick that will keep you from having to hoard large amounts of one product to meet demand. The inventory will always be fresh and moving quickly if you go with smaller amounts of a variety of products and make them exclusively available for a set amount of time.
Use a Classification System
Learn to classify your inventory if you want to learn how to reduce stock. A commonly used classification system is the simple ABC classification system for inventory. For the purpose of this article we will use this system based on costs.
Here is an example of how you should be classifying your inventory:
- Class A: Should make up about 5-15% of your inventory and be at about 70-80% of the total dollar value of inventory
- Class B: Will make up about 30% of inventory, with a 15% of the dollar value
- Class C: Will make up about 50-60% of your inventory with about 5-10% of the dollar value
A classification and analysis of your inventory is vital in how to reduce inventory. Each of the classes require a different level of monitoring and how you control that inventory.
A simple rule of thumb is the higher the dollar value (Class A) the more control you need to apply to the inventory to help reduce inventory cost and in reducing inventory overall. Classifications of B and C have less dollar value therefore need less control measures in place.
The percentage levels of your inventory in these classes will fluctuate based on your business needs. Keeping tight monitoring and control on your classifications will help to reduce costs and free up cash flow that can be used elsewhere.
Centralizing Your Warehousing
If you can, and many companies cannot, centralize your warehousing operations to one warehouse, this can also help with reducing inventory. You can order less inventory, and simply order it more frequently, of course, if you have followed some of the tips above and negotiated that arrangement with your vendors.
Make Customer Service Your Priority
Instead of focusing on safety stock and overstocking, focus on customer care. Customers can be very understanding when there is a stock out if you provide great customer care. A lot of businesses associate maintaining large amount of stock as providing exceptional customer service.
Of course, a customer can get frustrated when they get that out of stock message but if your business is well-known for providing exceptional customer care, the consumer will be back in a week to see if you have restocked.
Exceptional customer care can mean not having to worry about overstocking.