The Why and How of Controlling Inventory Costs

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The challenge of controlling inventory costs is a universal one for manufacturers, wholesalers and retailers alike. Inventory stock often accounts for a large portion of a business’s current assets and the cost of maintaining inventory is expensive. By reducing inventory costs, companies can improve profits, increase revenue and free-up capital to grow their business.

Inventory costs

Inventory costs are calculated to determine the amount of profit a business stands to gain and includes the original purchase price of inventory and all other costs associated with holding and storing that inventory stock over a certain period. The three types of inventory costs are:

  • Ordering costs
  • Carrying costs
  • Shortage costs

Controlling inventory costs

There are numerous strategies that companies can implement for the purpose of controlling inventory costs. The following are a few of the key, easily actionable tasks business can undertake to optimise inventory control:

Know your reorder point

Why: Ensure you don’t overorder and risk waste or underorder and risk stockouts. With effective reorder points you reduce carrying costs by not holding excess stock and mitigate the risk of shortage costs, disappointed customers and lost sales.

How: Reorder points can be determined using information from previous months to identify patterns and trends. Online inventory management software automates the process and eliminates the risk of human error to provide valuable insights into sales patterns.

Avoid overstocking

Why: Every item that sits unused or unsold in the warehouse is taking up space that could be utilised for fast-moving items and is at risk of damage, theft or obsolescence.

How: By knowing your reorder points and by clearing excess or obsolete inventory stock. Obsolete items are the costliest inventory you can have so try discounting, product bundling or even donating items to rid yourself of this stock. Investigate the viability of just-in-time inventory to reduce the need to hold inventory in your warehouse and drastically reduce inventory costs.

Organise your warehouse

Why: You should know what you have and where it is kept. A well-managed warehouse or storage system should make it easy for staff to quickly locate items and accurately track and record stock movements, optimising picking, packing and shipping processes.

How: Improve the layout of your store to optimise the inward and outward flow of inventory and use space efficiently. Can you easily access high-turnover or perishable goods? Utilise online inventory management, barcode and scanning technology to track inventory movements. Here are more tips on creating an efficient warehouse.

Reduce supplier lead times

Why: Lead time reduction works to lower your cost of inventory by allowing you to hold less safety stock. It enables you to order less stock more frequently, making it possible to reduce storage size and costs.

How: Streamline purchase order cycle times to improve inventory lead times. Build strong supplier relationships and partner with preferred suppliers to encourage a stronger bargaining position with suppliers who want preferred status.

Control inventory costs with online inventory management

An online inventory management system is a must-have tool to help reduce inventory costs. With online inventory management, you get real-time updates on stock movements across all sales channels.

In addition to letting you know when stocks are low, it also helps to identify your best-selling and worst-selling items. The ability to monitor your business in real-time identifies demand trends to improve demand forecasting.

Effective online inventory management tools will easily integrate with existing software, such as accounting, POS, eCommerce sales channels, shipping and order fulfilment applications to save time and resources. The more efficiently you can manage inventory, the easier it will be to cut inventory costs.

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Melanie - Unleashed Software

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.

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