How Savvy Businesses Reduce Inventory

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( — April 18, 2019) — For businesses that sell physical products, inventory management is a significant challenge that can make or break profitability and, in turn, long-term growth and success. Having too much inventory may sound innocent enough, but it’s not something you want to flirt with for very long.

The Negatives of Bloated Inventory

Proper inventory management doesn’t get nearly the focus it deserves, but it’s one of the most important elements of supply chain management. If you’re consistently bloated in this area, you may find your business affected by any or all of the following side effects:

  • Holding costs. Cost is the very first thing to think about. It takes a lot of space to store inventory and your company’s bottom line will be impacted when it stores excessive amounts of inventory over long periods of time. Either you’ll have to build out additional space within your own facility, or you’ll have to pay long-term storage fees for shelf space in a rented warehouse. Either way, it’s coming directly out of your profits.
  • Obsolete stock. If you’re in an industry where there’s rapid innovation or evolving styles – such as technology or fashion – your stock could become obsolete before you’re able to sell it.
  • Perishable products. For businesses that sell food, raw ingredients, or other perishable products, too much inventory can result in spoiled goods that must be disposed of.
  • Wasted time. Excessive inventory is a huge waste of time. It takes time to buy products, stock them, sort them, and – in some cases – dispose of the items when they don’t sell. This is all time that could be spent in other areas – like sales, marketing, or innovation.

3 Ways Businesses Reduce Inventory

There’s an optimal range of inventory where you have sufficient inventory to meet fluctuating demand, yet aren’t so bloated that you’re restricted in how you proceed. Here are some simple ways you can reduce inventory in your business and take a leaner approach to supply chain management:

1. Start From the Top

“Inventory optimization efforts are by far most effective through a top-down approach,” LeanDNA advises. “Too often, a disconnect exists between the priorities of managers and buyers. It’s the responsibility of executives and managers to create a culture of urgency around reducing inventory levels. This starts with setting and communicating clear goals at every level of the supply chain.”

Don’t assume that you can optimize inventory by sending out a couple of marching orders and expecting significant change. It requires a full-fledged effort from top to bottom. Whether it’s inventory management, marketing, sales, or product development, this is the only way to implement progressive, lasting change.

2. Eliminate Obsolete Products

For most businesses, the 80-20 Rule applies to inventory and sales. Roughly 20 percent of products produce 80 percent of revenue. This means four out of five products aren’t major sellers. Some – though not all – of these products are obsolete and should be eliminated.

Obsolete inventory tie up working capital without much to show for it. Holding costs are high and these products often take up space from more popular items that are exponentially more profitable. Getting rid of obsolete products through sale or consignment can help reduce some of this pressure.

3. Reconsider Purchase Minimums

Many businesses get talked into purchasing more inventory than they need in order to qualify for a lower unit cost (or to satisfy a minimum order quantity). But run out some calculations before upping your order.

“When the annual holding cost for the increased inventory due to the minimum order quantity more than offsets the annual purchase cost reduction, the higher unit cost with no minimum order requirements has a lower cost,” Supply Chain Management Review points out.

Believe it or not, there are times when it makes more sense to pay a higher price per unit, if it means freeing up inventory space to sell other products that are more profitable.

Avoiding Inventory Shortages

There are plenty of negatives associated with having an inventory shortage, so make sure you aren’t being too aggressive with your attempt to offload excessive inventory. There’s obviously a fine line between having too much and not enough. Over time, you’ll figure out where this line is so that you can do a better job of toeing it and maximizing your profitability.