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The inventory advisor

Nov 25, 2019

What is the real cost of your inventory and how to reduce it?

Your Inventory planner and your warehouse team must understand the figures involved when calculating the real cost of your stock. Although the companies expenses, liabilities, assets, etc. is not their responsibility, they should be made aware that the cost of stock is not only the price paid to the supplier. As an inventory planner, knowing what these costs are will help you to provide valuable costs saving insights to management.

On top of the cost of the stock item itself, here are other expenses that need to be built-in to give a true reflection of your cost of goods.

  • Transportation cost to get your inventory to your warehouse
  • The cost of the space in your warehouse to store your inventory, including rent, utilities, property taxes, and insurance
  • Safety equipment costs, such as fire suppression equipment
  • Warehouse equipment costs, such as conveyor belts, trolleys, forklifts, and pallet jacks
  • The cost of labor and security in your warehouse
  • The cost of loss via obsolescence
  • Deterioration, expiration, and breakage costs
  • The value of a lost opportunity in having your cash tied up in unsold inventory

Once employees understand the real cost of your inventory, only then can they start to see ways in which this can be reduced. It’s obvious, of course, a way to reduce costs would be to bargain with suppliers for better prices, but there are other areas to reduce costs. For example, you may place a larger than needed order on a supplier for better pricing. Still, all this excess stock needs to be stored, thereby adding costs to your storage, decreasing your margins, and tying up working capital.

Here are some useful tips on how to reduce your inventory costs

Avoid minimum order quantities from suppliers 

This is a suppliers way to offload their excess stock onto you instead form alliances with other companies that need the same stock as you or if you commit to future orders your supplier may forego the MOQ and allow smaller quantities

Know your reorder point  

Once you have historical data, finding optimal reorder points for your items should be less of gut instinct and more about data-driven insights.

Organize your warehouse 

To ensure staff efficiency when it comes to picking stock, you need a warehouse that runs effectively. For example, place your fast-moving items in the front of your warehouse – this optimizes your pick, pack, and ship process.

Get rid of obsolete stock 

Keeping stock that isn’t selling costs more than what you paid for the items in the first place. Try a special offer or bundle the product with a fast-moving item. However, be sure to not record this as a ‘normal’ sale that will trigger the reorder cycle. If none of these suggestions work, donate the items or write them off.

Order your inventory Just in Time 

JIT ordering does not suit all companies. It’s a process that requires you to have a healthy relationship with your suppliers and a good relationship with a reliable transport company.

Use consignment inventory 

In a wholesale situation, you could offload consignment stock to your retailers and utilize their shelf space instead of your warehouse space. The only catch to this is that your retailer won’t pay for this upfront, so weigh up the cost of your floor space relative to the cost of managing consignment levels.

Reduce lead times 

Shorter is better when it comes to lead times because that allows you to keep less safety stock and helps you cut down on excess stock. Shorter lead times can make it possible to reduce the size of your warehouse and your inventory value overall.

Monitor KPI’s 

To understand your business, you have to utilize measurements that give you visibility into your inventory. You can discover how healthy your warehouse is by measuring KPIs (Key Performance Indicators) and by monitoring your inventory turnover, cycle times, and fill rates. Compare your numbers with industry averages to assess how well you are managing your business and warehouse. These insights will assist you in reducing your inventory and other related costs.

Use accurate forecasts 

Forecasting demand through accurate and intelligent reports allows you to order just enough to meet your demand throughout the year, for every season. You can accurately determine what products you need to discard and what you need to reorder. Your forecasts should use historical data to produce more useful purchase orders.

It’s not possible to manage your inventory costs unless you have a clear picture of your inventory. The only way to have a clear picture of your inventory is to have an automated and integrated system. 

Leverage your ERP data with an Inventory management tool that will give you the insights to be able to tighten up your costs and warehouse efficiencies. You are doing your business a disservice if you are using outdated tools to run your warehouses. With the right tools in place, you can implement smarter, better inventory policies. It all starts with accurately measuring your inventory.