SRM/U5 Topic 6 Controlling costs and Reducing inventory Loss
In a competitive market, cutting costs is a smart way to stay one step ahead of everyone else.
So what costs should you cut?
Well, you could hire a 3PL provider to reduce overhead costs, or replace Excel inventory management with a more efficient system to increase your productivity – thereby reducing labor expenses.
The best cuts to make are in areas that already cost you a lot of money.
There’s one area of your business that costs 20-30% of your total inventory, and you should do everything possible to reduce its impact on your bottom line.
What is it?
Your cost of inventory.
There are many ways to cut the costs of inventory, and we’ll show you 10 ways that you can use today.
Before we do that, let’s define the cost of inventory.
What is the Cost of Inventory?
The cost of inventory is the “carrying cost” of holding and storing inventory over a certain period of time. It’s calculated to determine the amount of profit a business stands to gain. It also helps you determine how much more or less inventory you need to satisfy demand.
Types of inventory costs include:
- Purchasing costs
- Labor costs
- Transportation and handling
If you need help calculating your cost of inventory, you can use this formula.
If your cost of inventory is already higher than it should be, or you know it could be lower, then let’s check out a handful of ways to reduce those costs.
How Do You Reduce the Cost of Inventory?
The cost of inventory can quickly add up, leaving you with little profit and overblown expenses. You can reclaim your cash flow and grow your revenue by applying only 1 or 2 strategies for reducing the cost of inventory.
Here are 10 strategies to choose from, any one of which could help you reach your desired amount of inventory costs.
Avoid Minimum Order Quantities
A minimum order quantity (MOQ) is defined as the smallest amount or number of a product that a company will supply.
MOQs are very common, and they’re used by suppliers and manufacturers to unload more of their inventory on retailers and wholesalers – reducing their cost of inventory but increasing yours.
They might offer you deals to sweeten their MOQ, like “buy 50 widgets and receive 10 free widgets,” but this only adds extra widgets to your inventory you may not be able to sell.
There are a few ways to avoid the burden of MOQs.
If you’re friends with a fellow business owner who needs the same stock as you, pool your cash and buy it together and then split it between yourselves. This can go a long way in reducing your inventory costs.
You could also offer to pay your supplier a little more money for less inventory, enticing them to forego their MOQ policy – which could save you more money in the long run.
Of course, if you can negotiate a deal with your supplier to dismiss MOQs altogether without paying extra, that would be ideal.
Know Your Reorder Point
A reorder point formula will help you determine when you need to order your next shipment of stock.
Knowing your reorder point can ensure you never order too much and risk obsolescence, but never order too little and risk stockouts.
Organize Your Warehouse
An organized warehouse will help you efficiently sort your inventory and quickly pick it later. An unorganized warehouse will increase travel expenses along with the likelihood of misplaced or damaged inventory.
This is especially true in major warehouses where workers are traveling thousands of square feet for a single piece of inventory.
The key to laying out your warehouse is putting your fast-moving items up-front in the staging area. This optimizes your pick, pack, and ship process.
An added bonus is that a well-designed warehouse optimizes your stocktaking process, too.
Get Rid of Obsolete Stock
Holding too much inventory increases the chance that the stock you thought would sell is now taking up valuable space in your warehouse and costing you more money than you paid for it.
The essence of reducing the cost of inventory is inventory reduction.
The less you have, the less your costs will be. And obsolete stock is the most costly inventory you can have.
If you already have a lot of obsolete stock, you can try product bundling to sell more of it, or try discounting them individually.
If you can’t sell them, you may be able to donate your obsolete stock for a tax write-off.
Once you clear away the obsolete stock, you’ll have more room for fast-selling inventory.
Implement a Just-in-Time Inventory System
Just-in-time inventory (JIT) management is a method for keeping almost no inventory in your warehouse at all, but instead, ordering everything you need the moment you need it.
It’s a form of lean manufacturing that would mostly eliminate the cost of inventory.
It requires you to:
- Develop a strong relationship with your supplier
- Find a long-term supplier for each purchased part
- Shorten your production cycle
- Separate your repetitive orders from you one-stop business
- Institute or improve your quality control program
While JIT isn’t for everybody, it’s a proven way to dramatically reduce your inventory costs.
Use Consignment Inventory
Consignment inventory allows you to offload a portion of your inventory to the retailer carrying your inventory.
The catch to this arrangement is that the retailer doesn’t pay for the inventory upfront. Instead, they pay you when they make a sale.
If you’re OK with that, selling on consignment can be an easy way to reduce your cost of inventory.
Reduce Your Lead Time
Lead time reduction is the process of shortening the time it takes to receive a purchase order.
The shorter, the better.
Lead time reduction works to lower your cost of inventory in 2 ways:
It allows you to keep less safety stock inventory – which means less obsolete stock in the future
It allows you to order less stock more frequently – making it possible to reduce the size and cost of your warehouse
Tracking your inventory KPIs is an essential part of reducing costs in all aspects of your business, not just inventory costs.
The cost of inventory is certainly one major metric to track closely.
But you should also be measuring your write-offs and write-downs, your rate of inventory turnover, your cycle time and fill rate.
By comparing your numbers against your industry’s averages, you can assess how well you’re managing your business and warehouse, and how you can reduce your cost of inventory among many other costs.
Use a Perpetual Inventory System
The debate between periodic vs perpetual inventory is mostly coming to a close as more and more businesses recognize the cost-cutting power of a perpetual inventory system.
Perpetual inventory allows you to track your purchases and sales in real-time, allowing you to automatically order stock when necessary and maintain a healthy level of inventory.
Use Accurate Forecasts
Monitoring your business in real-time not only lets you know when you’re low on stock, it also helps you know your best-selling items, your worst-selling items, and trends in demand.
Forecasting demand through accurate reports allows you to order just enough to satisfy demand throughout the year, for every season.
You can also determine what products you need to discard, what you need more of, and give yourself the opportunity to test new products in the market.
But what SCM software will you need to acquire these in-depth reports?
A Must-Have Tool for Reducing Your Cost of Inventory
A cloud-based inventory management system is the tool you need to lower the cost of inventory.
It will help you know your reorder point, streamline your stocktake, lower your lead time, and deliver accurate metrics for tracking KPIs and forecasting demand.
The better you manage your inventory, the easier it will be to cut its costs.
If you want the tool that lets you manage your inventory from one intuitive interface, from anywhere in the world, whether you have 1 warehouse or 10, we can give it to you.