How to cut inventory costs efficiently

If you’re a stock-holding business, it’s hard to balance the amount of stock you hold to meet demand with capital expenditure. It becomes even harder when you throw in some of the highest inflation rates in history, rising interest rates, and increasing utilities, fuel and materials costs.

Everyone’s looking for ways to save money, but knowing the best way to cut costs while still meeting demand, avoiding overstocking and understocking and remaining profitable seems impossible.

Overstocking takes up valuable warehouse and storage space, incurring additional holding costs. It can also result in excess stock that needs to be heavily discounted or disposed of – neither makes the finance department happy.

Understocking can be just as costly. Not only could you miss out on sales, but you could also miss out on sales of related items. As it’s so easy for customers to find an alternative supplier, you could also lose them to a competitor and miss out on all their future orders. 

This blog highlights eight ways inventory management professionals can build an effective supply chain to cut supply chain costs without compromising the bottom line.

Demand forecasting

Getting your forecasting right is key to helping reduce costs so you can avoid overstocking or understocking. To get accurate demand forecasting, you need to consider more than just past sales. You should also consider market trends and customer behaviour to avoid under or overstocking.

Setting more accurate forecasts will ensure stock availability, improve customer satisfaction and prevent lost revenue. You’ll also be able to enhance your supplier, manufacturer and distributor relationships by providing them with forecasts so they can plan how to meet your deadlines and reduce shipments to minimise carrying costs.

Costs can be reduced across the supply chain by sharing information, collaborating on forecasting, and streamlining processes, benefiting all parties involved.

For tips on how to improve your forecast accuracy, you can read our ‘Improving demand forecasting accuracy’ blog

Supplier management

Building strong relationships with your suppliers is another way to reduce costs, including transportation costs, as it allows you to negotiate favourable terms, such as lower prices, bulk discounts or better payment terms.

Ensure you’re reviewing supplier contracts and assessing their performance regularly so you highlight cost-saving opportunities. You might find alternative suppliers that offer better value for money.

We discuss ways to manage suppliers through ranking, reshoring, nearshoring and multi-shoring in our ‘Supply chain and logistics management trends for 2023’ eGuide.

Container fill up

Although shipping container prices dropped following COVID-19, they have increased again due to the Red Sea disruption, leading companies to use longer, more expensive shipping routes.

Half-full containers can incur multiple tariffs and taxes, so you need to maximise the space and fill them to make each container cost-effective. However, filling them with items you know have upcoming demand is essential, rather than just adding random items or increasing quantities to fill the space. If you don’t, you’ll end up with excess stock that risks becoming dead stock and a cost on the balance sheet.  

Accurate forecasts will help you see upcoming demand for items, which allows you to provide timely, consistently sized order information to suppliers to help them combine your orders into batches to fill shipping containers and reduce the number of shipments and corresponding transportation costs. The fewer containers you use, the more money you save and the fewer emissions you release.

Our blog has some advice on how to fill shipping containers cost-effectively.

ABCXYZ analysis

If you don’t already, you should prioritise your stock based on its value and sales velocity using an inventory classification model such as ABC analysis. By classifying items as A (high-value, fast-moving items), B (moderate-value, medium-moving items), and C (low-value, slow-moving items), you can focus on managing the most critical inventory items more effectively, reducing costs associated with low-value stock.

ABC analysis provides an excellent first step in classifying inventory to focus on your most essential items. However, to really deliver optimal stock levels, you need to build in other variables, such as demand variability. You can do this through ABCXYZ analysis.

ABCXYZ classification can inform inventory management processes to set optimal order schedules and service levels.

Our blog explains ABCXYZ analysis and how it adds value to inventory management.

Regular audits

As demand changes as products move through their product lifecycle, it’s vital that you regularly check the health of your inventory to identify where stock is piling up or other areas for improvement.

Regularly reviewing your stock range also ensures you constantly stock the right items.

As your stock levels influence cash flow and indicate your company’s overall health, balancing stock levels with capital expenditure – also known as inventory optimisation – is critical to ensuring operational efficiency and delivering excellent customer service.

Download our free inventory health self-assessment to discover where you can make improvements.

AI-driven technology

Implementing AI-driven inventory management software and automation tools helps you streamline processes, improve accuracy, and gain near real-time visibility into inventory levels. These tools can aid in demand forecasting, tracking stock movement, managing reorders, and identifying areas for cost optimisation.

An AI-powered, cloud-based software-as-a-service (SaaS) inventory optimisation solution like EazyStock uses advanced machine learning to ensure you get the most accurate demand forecasts to reduce unnecessary stock levels while increasing product availability.

EazyStock connects to existing ERP or business systems to bolster digital supply chains and inventory management processes.

Once connected, EazyStock automates time-consuming and inaccurate manual processes, takes the pain out of ABC analysis and sorts your replenishment calculations and automatic daily order proposals.  

By optimising your inventory, you’ll have the right stock to meet expected and unexpected demand while carrying sufficient safety stock to meet unanticipated demand. If you think investing in software is too expensive, find out why cutting software budgets now could cost you money in the long run in our blog.

Our case study with Cutwel, the UK’s number one precision engineering cutting tool distributor, highlights how we saved them £1,500 per month from their largest supplier alone.

You can also read more about AI in our ‘What is Artificial Intelligence’ eGuide.

Efficient storage and layout

A quick-win, money-saving method is to organise your warehouse and storage spaces to optimise the available area. Can you make more use of vertical space with racks or shelves? Do you have proper labelling and tracking systems? Do your workflows minimise the time spent on handling and locating items? Improving warehouse efficiency enhances inventory visibility, reduces picking errors, and eliminates unnecessary storage expenses.

Our blog has more information about the role of warehouse technology and automation in supply chain management.

Continuous improvement

The economy and economic environment are constantly changing, so it’s important to review processes and systems regularly to ensure they’re still fit for purpose, identify areas for improvement, and implement cost-saving initiatives.

By implementing these strategies, inventory managers can effectively cut costs, optimise inventory levels, and improve overall supply chain performance.

If you’d like to discuss how EazyStock can help you save money now, speak to one of our experts now.