Large volumes of inventory don’t just lead to more management headaches – they can cut into your profits as well.
Of course, you don’t want to have too little inventory and risk losing sales through stock shortages.
So, in starting your company, you’ve erred on the side of caution and just order more than enough to meet your needs.
But storage space, shifts in demand, and lost/damaged goods are all contributing to the costs that eat into your bottom line.
Most businesses have 20-40% of their working capital tied up in inventory – so if you’re closer to the 40% end, it’s probably time to create an inventory reduction strategy.
The goal is to find your inventory sweet spot – where you have the lowest possible inventory levels without being understocked – in order to maximize growth and profitability for your business.
By following the 3 methods we’ve outlined below, you’ll be able to reduce your inventory while retaining just enough to meet fluctuating customer demands and supply chain availabilities.
Lead time is the amount of time it takes for raw materials to reach you after placing a purchase order. They vary widely depending on your supplier’s location relative to yours, their means of shipping, and the types of products you’re buying.
Lead times from local suppliers might be less than a week, while international purchases can take up to a month or more to reach you.
Keeping inventory on hand is the natural method to gracefully handle these fluctuations, but it’s not the only way.
Here are a few ways you can work with your suppliers to lower lead times and reduce your need to keep inventory:
Track how long it takes for key raw materials to reach your business after placing your orders. Through this, you’ll be able to identify suppliers with the highest lead times and either ask how you can work together to lower them or begin searching for a replacement vendor.
Sharing sales data allows your suppliers to understand your average order size and frequency, so they’ll be able to anticipate your regular orders and plan ahead to expedite your shipments.
Reducing MOQs allows you to order more frequently so your inventory levels can more closely match the demands of your business, which get’s you one step closer to the whole grail of modern supply chain management – just-in-time manufacturing.
In addition to tracking and working to lower lead times for your raw materials, eliminating obsolete inventory is another great way to reduce your goods on hand.
Inventory carrying costs are generally between 20-30% of the cost to purchase inventory, and for most businesses – especially resellers and wholesalers – roughly 20-30% of inventory is obsolete.
If your company has a carrying cost of 20%, and your total inventory value is $500,000, then your spending around $100,000 a year holding that inventory.
And if you can reduce 10% of that inventory by getting rid of obsolete goods, your business could save $10,000 a year.
How do you eliminate your obsolete inventory?
If you’re carrying a set of older models of some of your products, can you have them reworked into the updated model?
Or, can you have inventory that’s been worn from sitting too long refurbished to look and function like new?
While this strategy won’t work for many products, if the cost to modify your stock is less than 25%, and you’re fairly certain it will sell after it’s modified, then reworking it could save you a lot of money.
If you can’t rework your stock into an updated model, then your best bet is to slash the price by at least 25%. If you’re still not selling as much as you need to, then keep increasing your discount until you hit the market clearing price or the lowest possible price you can afford to sell at.
While selling at a high discount will negatively impact your revenue in the short-term, over time you’ll lose less money in wasted inventory while clearing more space for higher value inventory that can be sold more quickly at a higher price.
If you can’t modify your products and they’re not selling at discounts you can afford, you might still be able to reduce your losses by donating your excess inventory for a tax credit while saving the cost of waste disposal.
For example, EALgreen is a 501(c)(3) nonpartisan nonprofit that connects companies who have obsolete, outdated, or overstocked goods with Colleges and Universities in need of those goods.
By working with a service like theirs, you’ll get the maximum possible tax write-off and they’ll handle the logistics of delivering your dated goods where they can be put to good use. Win-win!
By effectively tracking and monitoring your purchasing habits, inventory levels, and sales figures, you’ll be able to more accurately predict the ebb and flow of market demands.
To do this, invest in reliable inventory management software.
This will help you gauge your best-performing products, figure out which times of year you sell the most of your products, and decide where and when you can safely reduce your inventory without risking stock outages.
But what features should you look for in an inventory management software?
Your software should be tracking all purchases, sales, and inventory flows to generate up-to-date reports on all stock sold while automatically updating your inventory levels as raw materials move through your process to the sale.
Real-time inventory data is best used by keeping everyone throughout your supply chain is up to date. This helps ensure all your key team members and suppliers are on the same page, your goods will be consistently delivered to your customers, and you can avoid costly stock issues and distribution delays.
Inventory reduction relies on an inventory management system that can effectively track each and every piece of your inventory – especially if the demands of your growing company include ever increasing volumes of raw goods and stock. Your software should help you organize and monitor your entire operation by allowing you to create product families, track thousands of unique SKU’s, and manage multiple warehouses to get a complete picture of all your inventory.
Inventory reduction is absolutely necessary to run a successful wholesale or retail business.
Focusing on reducing lead times from your suppliers, carrying less obsolete stock, and better predicting your future requirements will help you maximize your profits and minimize your losses when it comes to inventory management.
If you want to do all 3 of those steps more effectively…
The right inventory software will integrate all your purchasing, inventory, and sales data into easy to use, actionable reports that help you better manage your business by enabling you to make smart decisions – like increasing working capital through inventory reduction.
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