What factors should you consider when reducing inventory costs?

1 Demand forecasting

One of the key factors that affect your inventory costs is how well you can predict the demand for your products or services. Demand forecasting is the process of estimating the future sales volume and patterns based on historical data, market trends, customer feedback, and other factors. By using accurate and reliable demand forecasting methods, you can avoid overstocking or understocking your inventory, which can lead to waste, obsolescence, storage fees, or lost sales. You can also optimize your inventory levels to match the seasonal or cyclical fluctuations in demand, and adjust your ordering and replenishment schedules accordingly.

2 Inventory turnover

Another factor that you should monitor and improve is your inventory turnover, which is the ratio of your cost of goods sold to your average inventory value. Inventory turnover measures how efficiently you are using your inventory to generate sales, and how quickly you are selling and replacing your stock. A high inventory turnover indicates that you have a high demand for your products, a low inventory holding cost, and a low risk of inventory obsolescence. A low inventory turnover, on the other hand, suggests that you have excess or slow-moving inventory, a high inventory carrying cost, and a high risk of inventory spoilage or depreciation. You can increase your inventory turnover by reducing your order quantity, increasing your order frequency, offering discounts or incentives for fast-selling items, or liquidating or donating your obsolete or excess inventory.

3 Supplier relationships

A third factor that can influence your inventory costs is the quality and reliability of your supplier relationships. Suppliers are the source of your inventory, and they can affect your inventory availability, delivery time, order quantity, pricing, and quality. By building strong and long-term relationships with your suppliers, you can negotiate better terms and conditions, such as lower prices, higher discounts, longer payment terms, shorter lead times, smaller minimum order quantities, or flexible delivery options. You can also collaborate with your suppliers to share information, forecast demand, coordinate orders, and resolve issues, which can improve your inventory accuracy, visibility, and efficiency.

4 Inventory management system

A fourth factor that can help you reduce your inventory costs is the use of an effective inventory management system. An inventory management system is a software or tool that helps you track, control, and optimize your inventory levels, movements, and operations. It can help you automate your inventory processes, such as ordering, receiving, storing, picking, packing, shipping, and counting. It can also help you monitor your inventory performance, such as inventory turnover, fill rate, stockout rate, shrinkage rate, or inventory value. By using an inventory management system, you can reduce your manual errors, labor costs, and operational delays, and increase your inventory accuracy, productivity, and profitability.

5 Inventory optimization techniques

In order to lower your inventory costs, you can apply various inventory optimization techniques. These methods or strategies help you balance the costs and benefits of your inventory, and reach your goals. Examples of these techniques include Economic Order Quantity (EOQ), which is the optimal order quantity that minimizes total cost; Reorder Point (ROP), which is the minimum inventory level that triggers a new order; Safety Stock, which is extra inventory kept to prevent stockouts; ABC Analysis, which classifies inventory items into three groups; and Just-in-Time (JIT), a system of ordering and receiving inventory only when needed. Through these techniques, you can reduce or eliminate inventory buffers, waste, and inefficiencies.

6 Inventory performance measurement

A sixth and final factor to consider when reducing inventory costs is measuring inventory performance. This process evaluates how well you manage your inventory, and its impact on business outputs such as customer satisfaction, revenue, and profit. Measuring your inventory performance allows you to identify strengths and weaknesses, track progress and results, and make informed decisions. Common metrics used for this purpose include inventory turnover, fill rate, stockout rate, shrinkage rate, and inventory value. Inventory turnover is the ratio of cost of goods sold to average inventory value; fill rate is the percentage of customer orders fulfilled from available inventory; stockout rate is the percentage of customer orders that cannot be fulfilled due to shortages; shrinkage rate is the percentage of lost, damaged, stolen or expired inventory; and inventory value is the total cost or market value of your inventory.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?