In any business model, cutting unnecessary costs wherever possible is always a good strategy to improve company profitability. One area in which business managers may like to remove unnecessary costs is inventory.
Inventory can entail a raft of costs — known and sometimes unknown or hidden — which can really lock up a business’ cashflow. In this article, we outline strategies for cutting inventory costs, to free up your finances for other, more useful purposes.
What are inventory costs?
When we think of the phrase ‘inventory costs’ the first thing to spring to mind is usually the most obvious – the cost of purchasing inventory. And we would be right to focus on this cost, as purchasing inventory for business is no small task, especially as a business begins to experience greater levels of growth. And, of course, these costs all vary between inventory types, shelf-life, and how much is required in line with demand.
On the one hand, the bottom line is that these types of inventory costs can’t be cut out altogether. However, businesses may like to consider whether or not the way they are purchasing inventory is cost-effective. We suggest asking questions such as:
- Do my inventory purchases have a long or short shelf-life? If they have a short shelf-life, am I ensuring they are ordered only when necessary and selling quickly?
- Are there cheaper alternatives to the inventory we are currently purchasing?
- Would our vendors be open to providing discounts for certain inventory?
- Are we making a sufficient return on each item of inventory we carry?
In addition, there are other costs associated with inventory, beyond simply the price of the inventory itself. This includes staff costs (i.e. inventory managers), storage facilities, losses from obsolete or excess stock, transportation and delivery costs, insurance, security and taxes, and even electricity costs involved in keeping perishable items at a certain temperature.
Manage inventory costs with these strategies
Clearly, there are lots of areas where inventory can increase costs to businesses. However, through careful consideration and planning, business managers can make cuts in certain areas which won’t compromise the overall success of the business.
The right team?
Look at staff numbers. Every person employed means a new set of wages or salary, which of course will take up a big chunk of the company’s expenditure. It may be a good idea to look at your staff numbers and consider whether any changes could be made – do you have 10 staff managing inventory, for example, when you only really need eight? Another thing to consider is whether their tasks can be automated. For example, inventory management software might be able to take over the tasks of some people at a fraction of the cost.
Manage efficiently with the right tools
Another strategy for cutting inventory costs involves downloading inventory software. Inventory software can help give you more accurate predictions about inventory needs for the future on the basis of past sales trends. In doing so, you’ll be able to make more accurate decisions when ordering new stockpiles of inventory – reducing the risk that of ending up with obsolete or excess stock, which reduces cashflow significantly.
Get rid of excess stock
Of course, in the unfortunate event that you do end up with obsolete stock, a great way to reduce inventory costs is to sell this stock in bulk. For example, you may like to offer customers a bulk discount if they purchase two or more of any single item – this will help you get back some of the money that was originally tied up in cash assets. Here are a few more ways you can get rid of dead stock.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.