What do you do if your inventory carrying costs are skyrocketing?

1 Track your inventory turnover

Inventory turnover is the ratio of how many times you sell and replace your inventory in a given period. It indicates how well you are matching your supply and demand, and how efficiently you are using your capital. A low inventory turnover means you have too much inventory that is not selling fast enough, which increases your carrying costs. A high inventory turnover means you have a high demand and a lean inventory, which reduces your carrying costs. To track your inventory turnover, you can use this formula: Inventory Turnover = Cost of Goods Sold / Average Inventory You can compare your inventory turnover with industry benchmarks, historical data, or your own goals to see how you are performing. If your inventory turnover is low, you need to take action to improve it.

2 Reduce your order quantity

One way to improve your inventory turnover and lower your carrying costs is to reduce your order quantity. This means ordering less inventory more frequently, rather than ordering large quantities less often. By doing this, you can avoid overstocking, free up warehouse space, and reduce the risk of obsolescence and spoilage. However, you also need to consider the trade-off between ordering costs and carrying costs. Ordering costs are the expenses you incur to place and process orders, such as shipping, handling, and administration. If you order too frequently, your ordering costs may increase and offset the savings from lower carrying costs. To find the optimal order quantity that minimizes both ordering and carrying costs, you can use this formula: Optimal Order Quantity = Square root of (2 x Annual Demand x Ordering Cost / Carrying Cost per Unit) This formula is also known as the economic order quantity (EOQ) model. It assumes that the demand, ordering cost, and carrying cost are constant and known.

3 Implement cycle counting

Cycle counting is a method of regularly counting a portion of your inventory without disrupting your normal operations. It involves dividing your inventory into categories based on value, demand, or other criteria, and assigning a different frequency of counting to each category. For example, you can count your high-value or high-demand items more often than your low-value or low-demand items. By doing this, you can maintain accurate inventory records, identify and correct errors, and prevent inventory shrinkage. Accurate inventory records help you avoid understocking or overstocking, which can affect your customer satisfaction and your carrying costs. Cycle counting also reduces the need for physical inventory counts, which can be costly, time-consuming, and disruptive.

4 Adopt just-in-time (JIT) inventory

Just-in-time (JIT) inventory is a system of managing inventory that aims to eliminate waste and increase efficiency. It involves ordering and receiving inventory only when it is needed, rather than holding excess inventory. By doing this, you can reduce your inventory levels, save on storage and handling costs, and improve your cash flow. However, JIT inventory also requires a high level of coordination and communication with your suppliers, customers, and internal processes. You need to have reliable and flexible suppliers who can deliver quality products on time and at low costs. You also need to have accurate and timely demand forecasts, as well as contingency plans for unexpected events that may disrupt your supply chain.

5 Use inventory management software

Inventory management software is a tool that can help you automate and streamline your inventory processes. It can help you track your inventory levels, movements, and locations, as well as generate reports and insights on your inventory performance. It can also help you optimize your inventory planning, ordering, and replenishment, as well as integrate with your accounting, sales, and logistics systems. By using inventory management software, you can improve your inventory accuracy, visibility, and control, as well as reduce your manual labor and errors. This can help you lower your inventory carrying costs and enhance your operational efficiency and profitability.

6 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?