Inventory Management Techniques to Slash Costs

How to Cut Costs with Effective Inventory Management Best Practices

Are you running a busy e-commerce store and struggling to keep on top of your stock levels? Do you order too much, tying up working capital in a pile of inventory that just sits there? On the other hand, you could be underordering and losing sales opportunities to your competitors because you don’t have the right product when the customers show up.

Sound familiar? Don’t worry; you’re not alone.

Businesses struggle with this all the time. The great news is that you can revamp your inventory management process and save money. Below, we’ll share some of the most impactful inventory management best practices to help you reduce expenditure and operating costs.

How Mismanaged Inventory Can Escalate Costs

Mismanaged inventory can be a silent killer for your business, slowly eating away at your profits without you even realizing it. With no real-time visibility into your inventory, you’re flying blind, making decisions based on guesswork, not hard data.

One of the costliest consequences of mismanaged inventory is inventory shrinkage, which occurs when stock is lost due to theft, damage, or just getting buried in the back of a messy warehouse.

But it’s not just about the products that go missing.

Over ordering inventory can also cause problems. You incur all kinds of costs related to storage, obsolescence, and capital tied up in inventory. When you have too much stock sitting on the shelves, you’re essentially paying to store products that aren’t generating any revenue.

On top of this, if the merchandise becomes obsolete or out of season, you could be forced to mark down or write off those products altogether.

On the other hand, under ordering can easily result in stockouts and lost sales. When consumers can’t find what they’re looking for, they’ll purchase the same item from a competitor. According to a report by IHL Group, out-of-stock products cost retailers $1 trillion worth of sales per year worldwide.

So, how can you avoid these costly pitfalls?

Ultimately, it all comes down to effective inventory management. Managing your stock levels allows you to make informed decisions about when to reorder products and how much to keep on hand.

Effective Inventory Management Practices to Cut Costs

Effective inventory management will help you reduce costs – and increase revenue. The right approaches and tools will allow you to keep your inventory at optimum levels while minimizing waste and maximizing your reliability.

But where do you start?

Optimize Inventory Levels

Using inventory optimization tools is perhaps the most effective way to reduce inventory costs and improve performance. This means having the right stock levels to meet customer demand without having to carry unnecessary stock, which comes at a considerable cost.

Techniques you can use include setting appropriate reorder points and safety stock levels:

• Figure out reorder points for each product relative to lead times, demand seasonality, and required service levels.
• Establish safety stock levels to buffer against unexpected demand spikes or supply chain disruptions.
• Revisit these levels periodically as demand shifts, supplier performance changes, or any other events warrant adjustments.

Another technique is to implement just-in-time (JIT) inventory management:

• Adopt a just-in-time (JIT) inventory system to reduce the amount of stock you keep on hand and minimize storage costs.
• With this system, your order is based only on what you need and only when you need it (so you always have the right level of inventory at the right time).

Improve Demand Forecasting

Another cost-saving inventory management strategy is improving your demand forecasting so that you can deliver the right products at the right time without the risk of losing any sales.

But how can you achieve this?

• Analyze historical sales data. Use historical sales data to identify trends, patterns, and seasonality in customer demand. Look for correlations between sales and factors such as marketing campaigns, product launches, or external events.
• Monitor market trends and customer behavior. Stay informed about what’s happening in the market – who’s buying your products – and the trends that may influence or reduce future demand. Analyze customer behavior data, such as purchase frequency, average order value, and product affinities, to better understand what drives demand.
• Engage with sales and marketing teams. Work with your sales and marketing team to learn about customer needs, upcoming sales, and expected shifts in demand. Use this information to refine your demand forecasts and guarantee alignment across the organization.
• Implement a robust forecasting methodology. Develop a structured forecasting process that combines several data inputs and forecasting techniques (eg, time-series analysis, regression modeling, etc). Implement distinct roles and responsibilities for forecasting, and routinely review and adjust forecasts to actual performance.

Leverage Technology Solutions

This is essential for maintaining adequate stock levels and keeping costs at a minimum. With the right tools in place, you can automate processes, increase accuracy, and gain real-time visibility of your inventory levels and performance. One powerful solution to consider is ERP cloud based software.
Integrating an ERP system into your inventory management process offers several key benefits:

• Real-time visibility: Cloud access allows you to track inventory levels, sales data, and other relevant metrics in real-time, which in turn helps you make timely decisions and collaborate more effectively with your team.
• Simplified ordering processes: ERP systems can automatically generate POs at defined reorder points before supplier lead times expire, avoiding stockouts and overstocking.
• Better forecasting: By analyzing historical data and integrating that with other business areas such as sales and marketing, ERP systems can help you develop more accurate demand forecasts.
• Automated inventory tracking: ERP systems can automatically adjust inventory levels as transactions (sales, order fulfillments, etc) occur, which eliminates the need for manual data entry and prevents the kinds of errors that can result from it.

Other technological solutions can include barcode scanning systems, RFID tags, or mobile inventory management apps that can help you further automate your inventory practices.

Identify and Minimize Sources of Waste

Effective inventory management and cost optimization depend largely on waste reduction. This waste might not be completely obvious but could be due to:

• Overproduction: Producing more inventory than needed, resulting in excess stock and increased carrying costs.
• Inventory obsolescence: The possession of goods that are out of date, or are slow-moving and unlikely to sell, tying up needed resource space.
• Inefficient processes: Slow and cumbersome inventory management processes that cause errors, delays, and waste time and effort.

To minimize these sources of waste, consider implementing lean inventory management techniques, such as:

• Value stream mapping: Mapping your inventory control process from beginning to end to pinpoint bottlenecks, inefficiencies, and opportunities for improvement.
• 5S methodology: Reorganizing your warehouse or storage areas using the 5S principles (Sort, Set in Order, Shine, Standardise, and Sustain) to maximize efficiency and reduce waste.
• Continuous improvement: Regularly reviewing how your inventory management operates, and also seeking out feedback from employees to identify future opportunities for improvement and adjustment.

Manage Supplier Relationships and Negotiate Better Terms

By working closely with your suppliers, you can guarantee prompt delivery and maintain efficient inventory levels while also negotiating better terms. Using business accounting software that provides accurate financial reports allows you to analyze your supplier relationships. You’ll be able to identify those that cost the most and where you can pursue a better deal.

Here are some tips for managing supplier relationships and negotiating better terms:

• Keep the lines of communication open: Communicate with your suppliers frequently to discuss performance, problems, and possible areas for improvement.
• Share demand projections and production schedules: Give suppliers periodic demand forecasts and production schedules so they can better anticipate your needs and complete deliveries on time.
• Bargain for volume discounts: Use your buying power to negotiate a volume discount or better pricing for a long-term contract.

Conduct Regular Audits of Your Inventory

Regular inventory audits are crucial for maintaining accurate stock levels, identifying discrepancies, and preventing losses. Audits have the following benefits:

• Verify inventory accuracy: Make sure that what you have recorded as your inventory counts tallies with the actual physical inventory located in your warehouse or storage facility.
• Identify inventory shrinkage: Identify sources of theft, damage, or administrative errors that could lead to loss of inventory
• Optimize stock levels: Differentiate the fast-moving stock from the slow-moving stock (or stock that can’t be sold/returned and needs to be liquidated) and change the product mix accordingly.

To conduct effective inventory audits:

1. Establish a regular audit schedule based on your business needs and inventory complexity.
2. Use inventory management software to generate real-time reports and simplify the audit process.
3. Assign specific roles and responsibilities for conducting audits and investigating discrepancies.
4. Document audit findings and implement corrective actions to address any issues identified.

Key Takeaways About Cutting Inventory Costs

Effective inventory management is the key to driving transformational change for your business. Proper management could make a difference for your bottom line. Starting with optimizing inventory levels, improving demand forecasting, and following through on the other inventory management best practices listed here will reduce your operational inefficiencies and bring down your costs.

FAQs About Cutting Inventory Costs

How often should inventory audits be conducted?

The frequency of inventory audits depends on your business needs and the complexity of your inventory, but as a guide, quarterly or annually is recommended, with more frequent (spot check) audits for high-value or fast-moving stock.

What are the first steps to implementing new inventory management software?

First, audit your current inventory management processes. List out the pain points. Research software and compare it against your business needs, budget, and how scalable it will be in the future. Once you have decided on a solution, start planning for data migration, system integration, and employee training.

Can small businesses benefit from advanced inventory management techniques?

Absolutely! Small businesses can significantly benefit from implementing inventory management best practices and technology solutions. These techniques can greatly streamline operations, increase accuracy, reduce expenses, and free up time and resources for other key business functions.

How do you plan for seasonal variations in inventory management?

To plan for seasonal variations, analyze historical sales data to identify seasonal patterns and trends. Plan by working with your sales and marketing teams to forecast demand and order adequate levels of inventory. Consider using techniques such as safety stock or consignment to help you manage the seasonality of your inventory.