Inventory Shortage | 3 mins read

How to Reduce Inventory Shortage and Promote Turnover in 5 Steps

how to reduce inventory shortage and promote turnover in 5 steps
Hanh Truong

By Hanh Truong

While businesses should focus on increasing their inventory turnover, which refers to the number of times products are sold in a given period, it is also important to minimize shortages.

Inventory shortages are when there are fewer stock products in the warehouse or storeroom than what is recorded in the tracking system. By implementing steps to prevent this, organizations can increase their revenue and ensure a smooth operational flow.

5 Steps to Reduce Inventory Shortages

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In order to effectively optimize inventory, companies should implement 5 key steps.

1. Reduce Inventory From the Top

Inventory reduction is a popular strategy among organizations to improve turnover because it helps make more space for products that are more likely to sell quickly.

When reducing inventory, supply chain managers should first communicate their objectives, such as new inventory level goals, to each vendor and partner that is involved with the movement of goods.

With transparency between the top leaders in the supply chain, the organization can foster a unified and goal-centric work environment.

It is also helpful to set key performance indicators (KPIs) and assign each staff member with inventory tasks. This will make it easier for executives to track their progress with improving inventory turnover and to hold employees accountable.

2. Take Advantage of Automation

Carrying out inventory reduction techniques may require some organizations to invest in large amounts of time and labor. However, this can be remedied with automation and the latest software developments.

By equipping supply chain teams with technology, such as inventory management software, tasks related to maintaining stock can be simplified.

This digital inventory tool enables business users to track their products and waste online, effectively reducing the time necessary to do inventory counts by half. Additionally, the system collects data and provides reports related to spending, popular items, and revenue.

These features not only help employees work more efficiently, but will also give executives insight into what products they can reduce in their inventory to maintain profitability.

3. Perform ABC Analysis

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When improving turnover, business teams need to identify which inventory product generates the most revenue. Conducting an ABC analysis can help with determining which item is the most profitable and valuable.

The ABC analysis ranks products in accordance with the Pareto Principle, which is the idea that 20% of a company's inventory makes up 80% of its value. Goods that fit these standards are considered A level.

On the other hand, B items are those that have 20% value and make up 20% of inventory, while C products have 10% value but make up 70% of inventory.

Supply chain managers should prioritize their optimization techniques for products in the A' range since they bring in the most value.

Many companies may allocate more of their resources to stock A' level products to prevent shortages, but this should be done meticulously. Case studies have shown that doing this can result in overstocking and unnecessary inventory-related expenses.

4. Adopt a High-Level View

Business teams should adopt a high-level view of their supply chain to have a full understanding of their overall performance. This can be done by regularly examining real-time reports and assessing data from across all their production, warehouse, and distribution sites.

By being knowledgeable about the current financial and operational health of a business, teams can be agile and make prompt decisions to safeguard their bottom line.

Inventory management software can provide managers with full visibility into their warehouse with its reporting capabilities. These solutions are also cloud-based, which means users can access their inventory data remotely at any time and can share information to supply chain partners.

Additionally, executives should monitor their business's industry and current events, in case of unexpected supply chain disruptions. Some external factors, such as natural disasters, can quickly affect inventory levels and cause shortages. For example, an incoming hurricane may lead to more customers coming in-store to purchase non-perishable foods.

With careful assessments of these threats, organizations can prepare and make changes to their purchase orders to maintain optimal levels of inventory.

5. Integrate Lean Manufacturing Techniques

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Lean manufacturing is the practice of making continuous adjustments to operational processes. According to statistics, 70% of companies utilize these methods, including brands like Nike and Intel.

With lean manufacturing, organizations can enhance their inventory turnover by reducing obsolete stock and waste. This frees up valuable space in the warehouse, allowing managers to have more freedom to purchase quicker-moving items.

It will also help executives hone in on their demand planning, which is the process of forecasting future customer demand. By accurately determining client needs, businesses will be able to buy the right level of inventory and prevent instances of stock-outs.

By following these best practices, organizations can optimize their inventory system, prevent shortages, and promote turnover.