Minimizing inventory is a worthy goal for any business. Inventories take up a large chunk of capital that cannot be invested elsewhere, they need to be financed, and they can cost a fortune to hold; warehousing space, security, heating, ventilation, insurance, and obsolescence are just some examples of such costs. This goal comes with a sizeable ‘but’, however: pure inventory reduction comes at a price, usually reduced customer service.
Hence the goal as a manager should be to reduce inventory in a way that does not harm customer service, or at the very least so that any harm done is more than made up for in the savings gained by inventory reduction. There are certainly ways to do this, and a selection of these is detailed below.
Eliminate obsolete stock
This is the most-straightforward way to reduce inventory cost-free, yet many businesses fail to do it. One reason for this is that managers get obsessed with the idea that they must get value for any inventory that’s been purchased. Yet due to the high costs of holding inventory, which can be up to 30% or more of the annual amount spent on inventory, sometimes it is better to have a high-discount sale, or at worst scrap inventory that cannot be sold.
Be picky about suppliers
Make sure to use suppliers that are consistently reliable at making deliveries on time, so that you don’t need to hold extra stock to allow for their delay. The same goes for suppliers that provide you with reliable products with low customer return rates. Don’t stick to a supplier simply because of a pre-existing relationship; if a better supplier is out there that you aren’t trying, then you are effectively losing money for your business. Try out several suppliers and reward those that perform better for you.
Communicate up and down the supply chain
All too often businesses hold excess stock simply due to a lack of communication. Don’t let that be your business. Communicate upstream with your suppliers about things like minimum order quantities and price quantity breaks, which both lead to excess inventory being ordered. Terms like this are often negotiable if you simply ask what you can do for the supplier in exchange; such as provide longer-term forecasts for orders. Communicate downstream with customers to find out what is and isn’t valuable to them. For example, increasing delivery times to customers is not a drop in service quality if the customer doesn’t mind waiting a few extra days, whereas it could allow significant savings for your business as the extra time means you can afford to hold less stock at once.
Improve your forecasting methods
It is true that virtually every forecast, being an estimate, will be wrong. However, don’t let this stop you getting serious about how you make demand forecasts: being less wrong can make a big difference. Scrutinize what your forecasts are based on, whether historical data is used that doesn’t reflect current conditions well, whether incorrect assumptions are being used, and whether there are market trends that you haven’t yet accounted for. The narrower your margin of error is, the less safety stock you need to hold to account for this.
Reduce your lead-times
This applies especially to manufacturers. A lead-time is the latency between the initiation and execution of a process, such as an order and delivery to a customer. Reducing lead-times will generally mean that orders are turned over faster, and so you will be holding fewer inventories at a time. Hence, if you are taking six weeks from the time a customer orders a product till it gets to them, yet it takes only a few days to actually manufacture the product, then you should be able to do something to reduce your lead-time, such as change administrative processes, or switch delivery methods.
Many businesses now take advantage of automation options in their supply chain and business processes. You can now integrate software that links downstream to customers, automatically letting your factory know when an order is made on the shop floor, while updating the cumulative impact that orders have on your forecasts. This software can also link upstream to suppliers, letting the supplier know as soon as you are running low on some items so that they can ready their orders in advance. This software can be expensive to fully implement, but with cloud software delivery it is available at a fraction of the cost of previous times. The time has come to move on from Excel.
The above are just a few suggestions for reducing your inventory in a way that will benefit your business overall. This is far from an exhaustive list however, and spending time brainstorming about beneficial ways to do this is critical to the long-term efficiency and success of your business.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. When not writing about inventory management, you can find her eating her way through Auckland.