5 Inventory Reduction Strategies for a More Profitable 2016
- 5 Inventory Reduction Methods to Master in 2016
- Inventory Reduction Benefits
The fourth quarter is a popular time for companies to analyze their year-end profitability and performance. Executive management, finance departments and operations teams sit down to review the good, the bad and the ugly from the past year. It is a time for individual and departmental performance reviews, which can be a daunting and dreaded activity for businesses that do not have inventory control “under control.” For wholesale distribution businesses that carry non-perishable goods, it is easy to overstock and carry extra items over the course of the year to ensure customer demand needs are met.
This can be a good thing during the year as back orders are avoided and revenue streams can run without interruption. However, at the close of the calendar year, operations and finance teams are left with the mess of sorting through excess stock levels or inventory items that are no longer in customer demand. This can lead to a lot of finger pointing between departments that don’t want to get stuck carrying the blame for the extra costs in the supply chain. For most distributors pushing high volumes of items, costs at every level of the supply chain need to be contained and managed to ensure narrow profit margins are maintained.
A business that finds itself carrying an excess of inventory over the course of the year will inevitably be in for surprises when the year end analysis is complete. Carrying high item counts in the supply chain results in a reduction in available cash flow and can incur high carrying costs to store inventory items that do not necessarily need to be in the warehouse in the first place. Inventory reduction and cost containment strategies should be a primary planning key performance indicator for all distribution companies as they move into 2016.
Theoretically, inventory reduction planning is the process by which inventory is reduced to free up working capital and prevent over-stocked items from becoming obsolete over a specific period of time. Proper planning and more intelligent procurement processes can help planners avoid these costly mistakes all together.
This blog addresses 5 ways planners can get a better grasp of their cost containment and inventory reduction strategies for the coming year to keep performance and profitably strong in 2016.
5 Inventory Reduction Methods to Master in 2016
There are a number of common methods in use for reducing inventory. Below are the 5 strategies that can be leveraged by distribution companies to keep costs under control and the warehouse free from inventory that doesn’t belong.
- Reducing supplier lead-time
One way to keep inventory levels and costs lower is to negotiate faster supplier lead-times or to identify additional suppliers that can meet a quicker replenishment model. Higher lead times from suppliers mean that a greater amount of safety stock needs to be carried to ensure all orders are filled, which will increase the carrying costs to hold extra stock levels.
Faster lead-times gives planners more flexibility when reordering inventory and allows for less inventory to be carried reducing the short term carrying costs and the long term risk of holding items that become excess or obsolete.
- Eliminating obsolete inventory
Obsolete inventory are items that are in stock but do not have any customer demand. At EazyStock, obsolete inventory items are classified as items that have not been sold in 12 consecutive months or more. Obsolete items typically occur when newer product launches of an item are introduced to the market or customer demand patterns change due to unforeseen market shifts. Businesses should monitor the product life cycles of every unique item each month to track demand pattern changes over time.
Dynamically tracking demand patterns helps a business more accurately forecast demand and reorder points based on actual future sale potential. Obsolete items will tie up working capital, compound holding costs and can even take up storage space in warehouses that could be used for more popular items. While selling obsolete stock at a reduced price may have negative impact on short-term profits, it will have a long-term positive effect as burdensome carrying costs can be eliminated from the equation.
- Optimizing order size and purchasing frequency
Accurate demand forecasting and purchasing practices can support operation’s strategic goals of ordering enough to meet ongoing customer demand while not carrying too much extra inventory to keep costs under control. Increasing communication with suppliers can help to negotiate reduced Minimum Order Quantities (MOQs), so that smaller, more frequent orders can be placed offsetting long-term risks of holding too much inventory. Smaller, more frequent orders enable an organization to increase ordering flexibly for when variations in demand occur or demand patterns shift.
- Centralizing inventory control
Most of the time distribution networks will have multi-echelon planning models managed by independent or stand-alone inventory management tools. Multi-echelon inventory optimization can be hard for companies to manage without optimization software.
Optimization solutions enable analysts and planners to create more accurate models across all echelons of the supply chain, with a full inventory plan that includes optimal safety stock levels for all items, cycle stock and demand forecast projections. Companies can also use supply chain simulation to predict and set target service rates, inventory levels and redistribution capabilities for intelligently transferring items between warehouse locations.
Both excess stock and obsolete inventory are easier to prevent than to eliminate, and centralizing multi-location or multi-echelon supply chain models increases global item level visibility for smarter planning and procurement execution.
- Continuous inventory reduction analysis
While these methods of reducing inventory are effective, analysis will have to take place in order to ascertain if, why and how they might have an effect on the bottom line. Inventory planners can utilize a number of different techniques to better manage inventory levels across complex supply chains.
A few techniques to consider:
- ABC analysis
- Cycle counting
- Safety stock management
- Product life cycle management
- Economic order quantity management
Inventory Reduction Benefits
Inventory reduction will realize working capital for re-investment in other key business areas and maintain smooth cash flow for any business that operates with tight margins. Permanent elimination of obsolete stock will reduce capital lost in the supply chain and will increase usable storage space for higher selling items, therefore increasing the businesses return associated with relevant carrying costs.
Businesses now have the ability to increase efficiency and customer satisfaction without having to invest heavily into on premise technology. Cloud based software like EazyStock is an affordable, fast and effective solution for optimizing inventory balances across complex supply chains.
Practically there exist several ways and approaches on how an organization can lower the inventory levels and thus save costs. It is highly recommended to get an overview about the different inventory-related cost types and to keep track on them. More information concerning this topic is available in the following guide, which mention the most important cost types and provides ways to lower these: