How to Reduce Inventory Costs

Inventory represents one of the largest and most tangible investments of any retail or manufacturing business. Smart inventory management strategies can not only help boost profits but they can mean the difference between a business thriving or barely surviving.

Many business owners don’t realize the true cost of carrying excess inventory, which can be as high as 29 percent of the inventory’s value when you include all the carrying costs (interest, storage, damage, obsolescence, etc.). These costs come directly off the bottom-line profit.

Managing inventory is like a high-wire balancing act. If you stock too few of the right items, you’ll end up with empty shelves or not enough raw materials to meet customer demand. On the flip side, if you stock too many of the wrong items, you’ll end up with a surplus of unwanted merchandise or excess raw materials that sit around taking up space. Either way, you lose precious revenue opportunity.

What can you do to avoid inventory pitfalls? Following are six ways to improve inventory management and reduce your overall inventory costs:

1. Use just-in-time inventory management practices: As in manufacturing processes, just-in-time, or JIT, inventory management means having the right material, at the right time, in the right place, and in the right amount needed to make a product. Unlike traditional inventory management, JIT makes sure raw materials are ordered just when they are needed rather than weeks (or months) in advance, thus reducing in-process inventory and the associated carrying costs.
2. Train your employees well: Any employee responsible for ordering anything that comes through the doors of your company, whether it’s floor merchandise, raw materials, or just pens and paper towels, should receive inventory management training.
3. Use technology to your advantage: There’s a wide selection of inventory management software on the market today. The right technology can more than pay for itself by helping you streamline and improve inventory management and reduce costs.
4. Measure inventory turns and set aggressive goals: In many industries, four turns of inventory per year have traditionally been the norm. But with today’s sophisticated inventory management software and techniques such as JIT, businesses can often achieve more frequent inventory turns. Find out what kinds of turns are standard in your industry, and then make it your goal to exceed them. When done right, increasing inventory turns can boost profits and cash flow without actually increasing sales.
5. Reduce your inventory items: It used to be that keeping thousands of stock-keeping units, or SKUs, on hand was considered a competitive advantage (think of the old-fashioned hardware store that had almost any bolt, screw, or tool you could possibly imagine in stock). But nowadays overstocking is a sure ticket to unprofitability. Instead determine which items are selling best and keep enough of them in stock to meet customer demand, and minimize your stock of everything else.
6. View inventory realistically: It helps to view inventory for what it really is: cash sitting on your shelves, in your warehouse, or on your manufacturing floor. This makes it easier to decide what to do with the excess, whether it’s continuing to hold on to it, sell it at a discount, or purge or recycle it.

Don Sadler is a freelance writer and editor specializing in business and finance.