As a business owner, there is so much to consider when it comes to inventory reduction. Having too much can affect your bottom line, but having too little inventory means running the risk of running out of product and potentially losing customers. Too much or too little product is only part of the story. There are also things like storage, market fluctuations, and lost or damaged products that have a huge impact on your profitability.
Ideally, you want to find a happy medium where you have the lowest amount of inventory without being understocked, while running lean enough that your business is in the right place for you to realize growth and a healthy bottom line.
The idea behind reducing inventory is to free up cash and eliminate the risk of being stuck with obsolete product. There are some smart and effective ways to approach inventory reduction; let’s examine four that can have an immediate impact.
Lower Lead Times
Lead time is the amount of time that it takes for materials or goods to get to you after a purchase order has been placed with a supplier. The time that it takes for those orders to get to you has an impact on you based upon how close that supplier is to your location(s), the mode of transportation being used to ship, and what you’re buying.
You can make the most of just-in-time manufacturing by optimizing your supply chain through tracking your current lead times. Find out how long it takes for materials or goods to get to you and try negotiating faster lead times with your current vendors or finding different or additional suppliers to assist you. Pull your sales data from your point of sale (POS) software or your CRM tool and make sure that your suppliers see that data, so they have a better idea of what your order sizes and frequencies look like, and are able to anticipate your regularly placed orders.
Eliminate Obsolete Inventory
Obsolete inventory are products or materials that you’re carrying in your inventory but that have no customer demand. This is typically a result of a newer product launch or an unexpected shift in market demand. Once products or materials become obsolete, they start costing you extra money in labor and storage month over month.
A couple of ways to minimize your chances of being stuck with obsolete inventory is to continually monitor the product life cycles of goods month over month in order to track demand patterns. Additionally, consider reducing your minimum order quantities (MOQs) to help reduce the risk of having product on hand that becomes obsolete. If you do find yourself stuck with obsolete inventory, you can consider modifying it, discounting it, or donating it to receive a tax credit.
Improve Inventory Forecasting
Regardless of the size of your business, you’re going to want to find a seamless, accurate way to improve the way you forecast your inventory. Consider the use of inventory control software to help you track and monitor your regular purchasing schedule, see when your levels rise and fall, and what your month-over-month sales look like against the demands of the market. You’ll have clear data to support which products sell best and at what time of year, and you’ll significantly mitigate the risk of running out of product.
Inventory forecasting has come a long way, and now often uses business intelligence analytics and artificial intelligence or machine learning algorithms to improve inventory insights. Software has the ability to gather and analyze information much more quickly and efficiently than any human, which means your team can find inventory reduction insights faster without hiring a data analyst!
Centralize Inventory Control
Depending on how long you’ve been in business and the changing nature and dynamics of your company, you may have several locations all operating independently of one another. These different locations may also manage inventory differently. Consider shifting to a centralized inventory software. This can help you optimize when and where inventory should move in and out of specific locations, and how. This not only reduces waste and saves money, but it makes it easier for analysts and planners to have a better idea of how to manage the supply chain and manufacturing schedule.
Reducing inventory can have a big impact on your bottom line. Finding ways to reduce warehousing and labor costs, as well as freeing up capital otherwise tied up in product sitting in a warehouse can make a huge difference as you work to streamline and grow your business.
As you look at ways to reduce inventory, consider inventory control software and how it can have an immediate impact on the way you optimize your relationship with suppliers and shippers, improve inventory forecasting, and minimize risk.
Jessica Barrett Halcom is a writer for TechnologyAdvice.com, with specializations in human resources, healthcare, and transportation. She holds a bachelor’s degree from the University of Wisconsin, Green Bay and currently lives in Nashville, TN.