7 Strategies to Lower your Inventory Costs

Inventory is one of the biggest investments of most manufacturers, distributors and retailers. In fact, inventory carrying costs can be as high as 29% of the inventory’s value when you factor in things like storage, interest, obsolescence and damage. It’s essentially cash sitting on your shelves until it’s used or sold.

Here are seven strategies to help you lower your inventory costs and boost your bottom line.

1. Better manage your inventory levels.

The level of inventory you stock directly affects your time and resource management. Obsolete and excessive stock can quickly increase your carrying costs.

To determine what inventory to eliminate, first review historical sales reports, looking for products that have experienced a decline in demand. When you find such products, estimate how long it will take to sell your remaining inventory. If it’s going to cost you more to stock these items than you may potentially earn in profit, consider reducing the price to unload these budget-draining items.

2. Utilize just-in-time (JIT) inventory management processes.

The goal of JIT is to ensure that the right materials are delivered to the right place, at just the right time to manufacture products—not too early and not too late. So raw materials are ordered when they’re needed, not weeks or months in advance. This reduces in-processes inventory and the excess carrying costs associated with it.

3. Optimize forecasting with data-driven decisions.

Forecasting isn’t an exact science, but operating with accurate data is necessary for forecasting true demand. Perform forecasts not just annually—the baseline needed for financial accountability—but monthly or even weekly. The more frequently you forecast, the more confident you can be that your data is accurate. You’ll also be able to catch discrepancies sooner.

How long has it been since you evaluated your quarterly analysis, weekly forecasts and seasonal planning methods? Check with your financial advisor to make sure you’re following forecasting best practices.

4. Trim inventory lead time.

Getting products into inventory faster means fewer products need to be stocked. Work with your suppliers and warehouse staff to speed this flow by suggesting new processes and innovations.

A wide range of inventory management software programs can help you accomplish this. The right technology can easily pay for itself by helping you trim inventory lead time and reduce the number of items in stock while still being prepared to meet customer demand.

5. Accelerate inventory turns.

Four inventory turns per year has traditionally been the goal in many industries. However, more sophisticated inventory management software and techniques like JIT make more frequent inventory turns feasible.

Determine the standard inventory turns in your industry and then set out to exceed them. Turning over your inventory more frequently is one of the biggest keys to boosting profits and cash flow.

6. Rethink bulk purchasing.

Do your homework before making a bulk purchase. Examine historical sales to determine future trends and calculate the ordering cost. This includes any fixed fees the supplier charges each time you place an order and the number of hours an employee spends on ordering, transportation and receiving.

You’ll also need to determine the holding cost rate, or the cost of acquisition, taxes, breakage, insurance, warehouse overhead and pilferage for each purchase. Once you’ve compiled your background information, you’ll be able to assess the value of the potential purchase.

7. Aim for continuous inventory management improvement.

After you’ve implemented the cost-saving steps that make sense for your organization, your work isn’t over. You must continue to monitor progress and weed out waste. Evaluate your inventory purchasing system periodically, keeping an eye on customer service, supplier performance and internal assets.

Above all, make sure you’ve assembled a committed management team. Professionals dedicated to efficiency and continuous improvement will drive your business forward.

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