5 inventory reduction strategies to drive cost savings

For businesses that carry non-perishable goods it’s tempting to order and carry surplus stock to help meet market demand and hit order fulfillment targets. In some circumstances carrying excess stock can be a good thing: having all items in stock helps avoid costly back orders and keeps customers happy. However, holding too much can have a number of negative implications, such as high carrying costs, over-investment in stock and poor cash flow. So it makes sense to look for ways to reduce inventory and keep levels under control!

What are the potential cost savings from inventory reduction?

There are many financial benefits to introducing stock reduction strategies – in particular focusing on your excess and obsolete items. Carrying lower volumes of excess inventory in your supply chain can lead to lower carrying costs, such as reduced storage costs and inventory service costs. With less working capital tied-up in goods sitting in the warehouse, businesses will also have more money to invest in fast-selling lines or other areas of the business.

If excess inventory is managed effectively and stock levels are reduced, this can prevent an accumulation of obsolete stock which often has to be sold at a discounted price or even written off. It also helps keep cash flow healthy and has a positive impact on your end of year accounts!

Any organization looking to lower costs across their supply chain and improve profit margins should therefore start by taking a closer look at how to reduce their stock levels. However, simply cutting inventory across your entire product range is not the approach to take. Instead, here are five strategic inventory reduction methods that are certain to drive cost savings.

Top five inventory reduction methods 

We’ve written numerous blog posts on ways to reduce excess and obsolete inventory and lower inventory carrying costs. Here we’re going to focus on our favorite top five inventory reduction strategies.

1. How to reduce inventory using stock classification

For most companies 80% of their revenue comes from 20% of their stock. While these stats will vary to some degree, this is the theory behind ABC inventory analysis – a model that can be used to categorize your stock. Using ABC analysis, you can classify your inventory items into three groups based on their value to the business. A items are the most important in terms of the value they bring to your company, while C items are the least valuable. You can then prioritize the stock you carry, focusing on your A items to ensure better availability, rather than B and C. This could include reviewing their demand forecasts more frequently or interacting more regularly with suppliers to improve lead times.

Pink, yellow and green wooden blocks displaying A, B and C on a wooden table. 

Reducing inventory levels with ABC classification ABC analysis

If you’re looking for a more advanced form of inventory classification you could consider ABC XYZ analysis which takes into account forecastability (the likelihood demand will vary from the forecast). But for a more sophisticated means of inventory classification you’ll need to use inventory optimization software to do the job automatically.

A tool like EazyStock will prioritize which inventory items to carry, based on multi-dimensional criteria, such as demand types, pick frequency, demand volatility and cost to sell (or profitability). It will dynamically set stocking policies and adjust reordering parameters for every item in your warehouse

This makes it much easier to achieve high rates of order fulfillment (or service levels) without carrying large volumes of every inventory item. At the same time you can reduce levels of less important items, or simply not stock them at all, reducing inventory investment and saving on warehouse space.

2. Shorter order cycles help with inventory reduction

Reducing your order cycles and order quantities is another popular inventory reduction strategy which also helps improve inventory turnover. Smaller, more frequent ordering gives you more flexibility to meet changes in customer demand while preventing a build-up of stock and keeping carrying costs under control.

However, this strategy has its challenges:

  • You need to use accurate inventory forecast models which apply seasonality and trends to ensure any fluctuations in demand are accounted for when reordering stock.
  • Ordering in smaller quantities is only possible if your supplier doesn’t require large minimum order quantities (MOQ). Sometimes ordering in bulk brings the benefit of discounts. If this is the case, you need to weigh up the unit cost saving against the increase in carrying costs. Using an economic order quantity formula can help.
  • Are your internal purchasing processes efficient enough to allow you to reduce your order cycles? Reordering more frequently takes time, which teams using manual processes may struggle to find.

In each of these cases, inventory optimization software can help. For starters, EazyStock has a powerful forecasting engine that uses a range of statistical algorithms to calculate demand, including seasonality and trends, to ensure replenishment meets market demand variances, no matter how subtle.

Secondly, EazyStock automatically calculates optimum order quantities based on a range of variables, including demand forecast, MOQs and order cycles. It’s price break feature is able to calculate whether a large order at a lower ‘price per unit’ will save you money or if you’ll actually profit more from purchasing smaller quantities more frequently. It also has the ability to use economic order quantity functionality.

Finally, because the entire reordering process in EazyStock is automated, inventory management teams find they have the resources to order as frequently as required. Inventory planning and replenishment becomes less about crunching numbers and more about working with EazyStock’s results – managing by exception and making informed and timely decisions.

3. Supplier lead time reduction

Supplier lead times have a big impact on the amount of stock you hold. For example, if lead times are long or continually fluctuate, you’ll need to carry more safety stock to cover the risk of run-out while you wait for your delivery.

Hundreds of shipping containers in a port.

Reducing supplier lead times to lower stock levels.

The Coronavirus outbreak has seen many US businesses affected by increased lead times, with an overwhelming number suggesting they will re-evaluate their supply chains and look for ways to release their dependency on one supplier.

Faster, reliable lead times give planners more flexibility when ordering inventory and offer a way to reduce stock levels and the associated costs.

EazyStock has a range of functionality to support with supplier order management. In particular it can dynamically track supplier lead times and adjust safety stock and reorder points accordingly, to help prevent stock outs.

4. Multi-echelon inventory reduction techniques

Businesses that have multi-echelon (multi-tier) supply chains can find it difficult to optimize inventory levels at each stage, especially when ordering is decentralized using independent forecasts and planning models. Typically, planners only forecast and order for their part of the supply chain and this leads to a ‘bull-whip’ effect. This is when a small fluctuation in demand at the top of the supply chain has an augmented effect on the demand forecasts further down, as each planner orders ‘a little extra’ and inflates their forecasts to cover the risk of run-out. But when this is done at each echelon of the supply chain these ‘little extras’ amount to surplus stock.

Inventory optimization software, such as EazyStock, enables inventory management teams to plan and manage inventory with one centralized view. Forecasting and reordering calculations can be based on point of sale demand data, not demand at each stage of the supply chain. And, with a view of stock levels across all echelons, inventory can be balanced out, so excess stock at one location can be redistributed to other sites, where levels of the same item are lower.

5. Eliminating obsolete inventory

Obsolete inventory items are those that no longer have any customer demand. This typically occurs when a product is superseded by a new model, or when tastes and fashions change and the drop in demand isn’t managed effectively.

To prevent a build up of obsolete stock it’s critical to understand where in the product life cycle each of your inventory items sit (such as growth, maturity or entering decline). As items begin to reach the end of their product life cycle you can put stock reduction strategies in place to manage slow-moving items. These could include launching sales promotions to generate demand, finding new markets where the product is still popular, or simply adjusting reordering parameters so you’re reducing the amount of stock being ordered in line with the declining demand.

EazyStock automatically tracks inventory items through their product life cycle and then applies the most suitable demand forecasting algorithms, stocking policies and reordering parameters to ensure stock levels mirror future sales potential.

If you’re carrying obsolete stock, it’s important to get rid of it to improve inventory turnover and help with stock reduction. While selling obsolete stock at a reduced price may have a negative impact on your short-term profit margins, in the long-term it will have a positive effect on your bottom line.

Which inventory reduction strategy is the best?

There are many inventory reduction methods supply chain management teams can use to deliver cost savings – but there’s no silver bullet. Simply reducing the stock levels of all product lines is not the answer.

With an inventory optimization tool you have the ability to optimize your inventory levels, so you have enough stock to meet upcoming demand, without building-up a surplus. If you’d like to understand more about the ‘health’ of your inventory, contact our experts who can carry out a stock health analysis. We’ll profile your current demand patterns, identify your top 25 excess inventory items and show you where you can cut back investment.

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