7 foolproof ways to reduce your inventory costs

Inventory asset management is like a high-wire balancing act.  Smart inventory management strategies can take a business that’s teetering on the edge of a cliff, give it a harness, and build a sturdy bridge underneath it. 

Many business owners don’t realise the true cost of holding excess inventory.  When you include all carrying costs (interest, damage, storage, etc.) you can incur extra expenses as high as 29% of the inventory’s actual value.

If you don’t stock enough of the right items, you could miss out on opportunities to meet customer demand.  However, if you fill your shelves to the brim, at the end of a season you could be holding unwanted merchandise or raw materials that you’ll have to pay storage fees on, or sell at a heavily discounted rate.  Either way, you will lose money.

If you want to reduce your inventory costs, these 7 steps will help you on your way.

1 – Determine your stock cycle.

By forecasting, estimating and scheduling carefully you’ll get an accurate idea of the way you should handle your inventory, with this information you can start to plan more effectively.

2 – Understand total cost.

Evaluate your holding, insurance, damage, transport and interest costs to get an actual view of the cost of your inventory management.

3 – Use Just-In-Time (JIT) inventory management practices for certain items.

JIT inventory management means having the right material, at the right time, in the right place, in the right amounts to make your product.  Some raw materials should be ordered as they are needed, not weeks or months in advance. 

4 – Use technology to your advantage.

Effective use of a Computerised Maintenance Management System (CMMS) or Vendor-Managed Inventory (VMI) can increase item visibility.  Information replaces inventory.

5 – Forecast events.

If one-time demand clutters your sales history, or if a one-time event is coming up (affairs such as a promotion, a big contract, a client event) you must take these into account in your inventory forecasting. 

6 – View inventory realistically.

It helps if you view inventory for what it really is: cash siting in your warehouse, on your manufacturing floor, and on your shelves.  It’s not being used to make money, it is depreciating.  Cash flow is the name of the game, so keep those items moving.

7 – Continuously measure performance.

Keeping track of past trends and usage will go a long way when you’re planning for the future.  When an item is moving, keep excess on hand, if it’s a slow moving product or item, minimise your holdings. 

Keeping these tips in the forefront of your mind will help you minimise some of the many costs excess inventory can have on your bottom line.