Article updated in March 2023 to reflect current trends, statistics, and new information.
It is crucial to optimise inventory control to help reduce your inventory waste. However, before you can reduce waste, you need to first understand where this waste occurs.
Based on the principles of lean manufacturing, we have identified five areas of inventory waste where companies can reduce waste to improve productivity and lift profit.
What is inventory waste?
Inventory waste refers to excess stock that cannot be sold. It may be that there is too much stock and not enough demand, that the stock has expired or been stolen, or that it’s simply lost. Inventory waste was identified as one of the seven types of waste in lean manufacturing.
What are the main types of inventory waste?
Inventory waste can be broken down into 5 categories:
- Finished product
- Raw componenets
- Office consumables
- Maintenance, repair and operations
Let’s dive deeper into each of these.
Finished products or goods ready for sale are by far the most expensive items of inventory due to the amount of time and money invested in them.
Furthermore, a certain amount is often retained in inventory to ensure a company has the ability to fulfil customer demand in a timely manner; few companies operate a zero-finished-goods inventory policy.
This inventory refers to those partly assembled components that form a unit which can be quickly used to create the finished products as customer orders roll in.
Sub-assembly inventory should be monitored very closely as it can have a two-way negative impact if levels become too high.
Raw component inventory
By ordering larger quantities, expedited shipping costs associated with hurried orders can be avoided and fluctuations in customer demand can be mitigated. On the flipside is the financial cost.
While it might be great to cut costs by taking advantage of bulk-order savings and shipping, the lack of cashflow and cost of storing materials can often be significant, off-setting any savings that were possible. T
his usually represents the largest of a company’s inventory waste and so it is imperative to understand it fully. Instead, businesses might consider optimising production so that lead times and stored inventory can be reduced.
Office consumables can form a significant part of inventory waste and are often underappreciated as they go seemingly unnoticed.
A risk of this is that reasonable amounts of money are spent on their purchase and storage, while they are also at risk of pilferage due to items being multi-purpose, generic, household consumables.
Therefore, it essential to identify this form of inventory and actively control it so that waste can be minimised.
Maintenance, repair and operations
By keeping too many replacement parts, inventory waste is inevitably created.
So, what is the solution? Businesses can develop a preventative maintenance program to minimise sudden breakdowns and give enough time to order replacement parts or inform staff of machine downtime.
It will still be necessary to hold some components which have longer lead-times, however, this could be an area for improvement and subsequent reduction of waste by working with suppliers to optimise lead-times and consistency of supply.
5 common causes of inventory waste
Inventory waste can cost your business valuable time and resources. Inventory ties up capital and if you’re not managing it effectively it will quickly absorb important cash flow and worse, it can hide inefficiencies within your operations.
Producing too much stock in advance means you not only incur the high costs of holding inventory, but you could also be left holding stock you’re unable to sell.
Avoid overproduction by making things only as quickly as the customer wants. Just-in-time inventory lets you hold the minimum stock required to keep your business running. You can order what you want for your immediate needs and limit overproduction by only producing what is needed, when it is needed.
Accurate forecasting would also inform your manufacturing decisions. Here’s how to incorporate demand forecasting to your business.
Delays, referred to as the ‘waste of waiting’, increase production costs and generally occur through the inefficiencies of processing bottlenecks or late delivery of supplies or information.
Manufacturing bottlenecks can also adversely affect the entire processing chain. Whether waiting for a delivery of raw materials, a previous task to be completed or a machine to be fixed, having employees sit idle while they wait is a cost to the business.
Mitigate delays by automating the entire inventory replenishment process using smart software solutions for timely deliveries. Look at optimising other areas of your business such as your warehouse to help manage production flow and efficiency.
3. Inventory defects
Defects can result from poor design and equipment to lack of operator training and non-standard procedures. The costs associated with inventory defects include the price of problem solving, rework, rescheduling, extended lead times, delivery fails and a very real likelihood of unhappy customers when you have failed to meet their needs.
Eliminate inventory waste by reducing raw materials, work in progress and finished goods. The leaner your inventory stock on-hand is, the easier it is to recognise and rectify defects as they occur. Invest in modern equipment and the right software that helps the business to remain competitive while maintaining a consistent quality while helping to reduce waste.
Doing more than the customer asks for sounds like a great way to encourage loyalty but it can very quickly result in inventory waste. If what you are doing doesn’t increase function, appearance or speed to market of a product, then it represents an inventory waste. Over-processing can also include double-handling or excessive product packaging.
Review each step in your operations to determine where waste can be effectively reduced. Any process inventory stock goes through that does not change its value should be eliminated.
Overproduction of inventory is a leading factor in transport waste. This increases the need for manual handling, moving stock from one functional area to another with your warehouse or transporting inventory between factories and stores. Excessive transportation and handling increases the chance of damage or loss and every moment your loaded trucks are inactive at a loading dock can be considered inventory waste. From drop trailer programming to expedited freight, there are numerous reliable solutions that keep your freight moving seamlessly and your customers happy.
Manage resources to reduce inventory waste
Effective cost-cutting is the ability to reduce your material waste while keeping product quality high. This includes making good use of your electricity, gas, water and any other resources and will lead to greater resource efficiency, reduced environmental impacts and an increase in profits.