How to Reduce Inventory & Why it Matters

How To Reduce Inventory September 19, 2022

Jin Hyun

Writer

Beyond the obvious expense of purchasing goods, a company's cost of inventory is a multi-layered financial burden that ranges from warehouse storage to taxes, labor costs, and even security concerns. This essentially means a company's cost of inventory envelops the complete expense of carrying stock.

While calculating this overall outlay is vital to determining profit margins, overstocking inventory can dramatically impact those margins and cost a company thousands of dollars due to wastage.
Keeping a tight rein on inventory control processes and reducing stock where possible is essential to the financial health of a business, as it negates the need to take on profit losses in order to sell slow-moving or obsolete stock.

5 Inventory Reduction Methods

To keep costs under control and reduce obsolete stock levels, there are several strategies that can be implemented to reduce inventory and ensure maximum efficiency of stock management.
Reducing supplier lead-time, optimizing order sizes, and steering clear of minimum orders are excellent methods to execute. Consider the following five tactics below.

1. Negotiate faster supplier lead times
If a distributor has slow lead times, this can mean a company is forced to carry more inventory for longer periods of time and thus increases stock managing risks and costs. Negotiating with a supplier or shopping around for additional suppliers who are able to meet quicker supply times allows a company to replenish products faster.

2. Track demand patterns
Accurately forecast the demand for supply and reorder points by efficiently tracking the product demand patterns. This can be done by monitoring product life cycles and following long-term sales data.

3. Optimize order size and purchasing frequency
Minimum order quantities can be incredibly counter-productive to keeping control of inventory levels. This means increased communication with suppliers and better demand forecasts can help companies avoid having to place mass bulk orders and carrying too much stock as a result. Smaller, more frequent orders are a great method to maximizing inventory management and when those stock projections have been effectively predicted, the risk of running out of stock is further minimized.

4. Centralized inventory control
Distribution networks frequently employ multi-echelon planning models that are controlled by independent inventory management tools. This form of inventory optimization is best done with software that enables management to track and monitor product volumes in real-time. Inventory management software can integrate with barcode scanners to provide perpetual stock counts, significantly increasing the accuracy of recorded stock volumes. With accurate inventory information, businesses can reduce the risk of inadequate replenishing procedures and mistakenly ordering redundant stock.

5. Ongoing inventory reduction analysis
Continued analysis of all stock levels must be in place for each of the above methods to work. Some effective tools for this analysis include the ABC method. This involves dividing stock into three categories with A being higher-priced and more valuable items, B being stock with a higher turnover but lower profit margin, and C being the lower cost items that traditionally turnover at a higher rate. Cycle counting can also be beneficial. This involves the regular stocktake of items, generally one product at a time, to keep on top of any inventory discrepancies.

Benefits of Reducing Inventory

From saving capital spent on wasted goods, to cutting down on warehouse space that could be better utilized for valuable products, the benefits of reducing inventory and implementing efficient management strategies are many.

While overstocking products can be tempting as it negates any desperate, last-minute back-ordering and ensures an uninterrupted revenue stream, the cons frequently outweigh the pros. This is especially true in terms of the overall cost of inventory and the very real danger of the products becoming obsolete.

Ensuring a company stays within its target profit margins means inventory reduction strategies are crucial. These strategies have the additional benefit of freeing up company capital, which could be better spent on other aspects of the business.

The top 3 benefits of reducing inventory include-

1. Greater supply flexibility
Quicker supplier lead times mean a company can make smaller orders at greater frequencies while delivering the significant benefit of increased flexibility to the resupply process. This flexibility is crucial to meeting last-minute stock needs, pulling back on a soon-to-be outdated item, or simply keeping up with product trends.

2. Risk reduction of carrying obsolete inventory
Carrying out-of-date stock that has a minuscule chance of selling is every company's worst nightmare. Reducing inventory levels minimizes this risk of having the warehouse bogged down with products collecting dust, racking up storage and security costs, and disintegrating profit margins.

3. Enables better inventory control
Obsolete or excess stock is easier to prevent than to shift and the implementation of an inventory strategy that can appropriately meet consumer demands can create greater customer satisfaction.