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Think inventory costs aren’t important? Your competitors disagree.

October 21, 2020

Manufacturers, distributors, retailers and supply chain management professionals are doing everything they can to lower inventory costs in order to stay ahead of the competition. If you’re struggling to trim inventory spending, take advantage of these five strategies to reduce costs.

1. Smartly manage inventory levels

The level of inventory you keep on hand directly affects your time and resource management. Obsolete and excessive stock can quickly increase your carrying costs.

To determine what inventory to eliminate, first review historical sales reports, looking for products that have experienced a decline in demand. When you find such products, estimate how long it will take to sell your remaining inventory. If it’s going to cost you more to stock these items than you may potentially earn in profit, consider reducing the price to unload these budget-draining items.

2. Optimize forecasting with data-driven decisions

Forecasting isn’t an exact science, but operating with accurate data is necessary for forecasting true demand. Perform forecasts not just annually—the baseline needed for financial accountability—but monthly or even weekly. The more frequently you forecast, the more confident you can be that your data is accurate. You’ll also be able to catch discrepancies sooner.

How long has it been since you evaluated your quarterly analysis, weekly forecasts and seasonal planning methods? Check with your financial advisor to make sure you’re following forecasting best practices.

3. Trim lead time

Getting products into inventory faster means fewer products need to be stocked. Work with your suppliers and warehouse staff to speed this flow by suggesting new processes and innovations. For example, simplify product tracking by adding purchase order numbers outside boxes.

4. Rethink bulk purchasing

Do your homework before making a bulk purchase. Examine historical sales to determine future trends and calculate the ordering cost, which includes any fixed fees the supplier charges each time you place an order and the number of hours an employee spends on ordering, transportation and receiving.

You’ll also need to determine the holding cost rate, or the cost of acquisition, taxes, breakage, insurance, warehouse overhead and pilferage for each purchase. Once you’ve compiled your background information, you’ll be able to assess the value of the potential purchase.

5. Aim for continuous improvement

After you’ve implemented the cost-saving steps that make sense for your organization, your work isn’t over. You must continue to monitor progress and weed out waste. Evaluate your inventory purchasing system periodically, keeping an eye on customer service, supplier performance and internal assets.

Above all, make sure you’ve assembled a committed management team. Professionals dedicated to efficiency and continuous improvement will drive your business forward. Get in touch if you need short- or long-term staff members to assist you.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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