Get ready to reduce stock out and stock over by 10% through effective inventory management.
Businesses are constantly struggling to control their expenses across various fields in a manufacturing unit. Reducing inventory costs has been one of them and it’s extremely crucial as it has been one of the most capital-intensive areas.
Though it’s challenging, inventory cost reduction is still attainable if we apply some effective inventory management strategies.
This guide brings you practical and effective cost reduction strategies for productive inventory management and cost reduction. Let’s kickstart the guide to learn how to reduce inventory costs.
Top Strategies in Inventory Management
Vendor Managed Inventory
VMI shifts the responsibility of inventory management to your suppliers, instead of you, under VMI, the supplier becomes responsible for optimizing the level of inventory held by the distributor. The customers share requirements, product needs, and information with the supplier. The supplier, thus ensures the supply of the right amount of inventory. This cuts down any ambiguity, and mismanagement leading to cost hikes.
Why VMI?
- VMI improves the supply chain efficiency
- This approach results in enhanced communication
- VMI also manages reduced stockouts and overstocking.
Improve Supplier Relationship
Another effective strategy to reduce inventory costs is improving supplier relationships. Conducting regular audits of existing relationships ensures the transactions are smoothly run. Also, using the Key Performance Indicators for your most esteemed or important suppliers helps track performance metrics like delivery timeliness and product quality.
How to Improve Supplier Relationships?
Follow the following steps to improve supplier relationships.
- Regularly review communication channels to ensure they are efficient and effective.
- Set and monitor KPIs such as on-time delivery rates, product quality, and issue resolution times.
- Maintain open lines of communication with suppliers to address concerns promptly and foster a cooperative relationship.
FSN Analysis:
This strategy categorizes inventory into three types: Fast-moving, slow-moving, and Non-moving. This categorization helps identify issues related to consumption, usage, and quantity held in storage.
How to implement FSN Analysis?
| Inventory Categorization | Categorize products according to their turnover rates |
| Storage Optimization | Store fast-moving items in easily accessible areas, while placing the non-moving items in less accessible or phased-out zones |
| Inventory Review | Regularly review and adjust the categorization to reflect changing sales pattern |
Dropshipping:
Dropshipping involves accepting the orders without holding the stock to fulfill them. Instead, the orders are directly sent to a related supplier or manufacturer, who then directly ships the products to the customers.
Why Dropshipping?
- It eliminates the need for storage space and associated costs.
- Reduces the labor costs.
- It helps the businesses scale up or down without freaking out about inventory management problems.
Set Recorder Points:
This strategy works best for frequently purchased items. Setting recorder points ensures timely replenishments and prevents stockouts. The recorder point is calculated based on average daily use, average lead time, and safety stock levels.
Calculating Recorder Points:
To set the record points, you need a few calculations.
Safety Stock = (Max Daily usage x Max Lead Time) – (Avg. Daily Usage x Avg. Lead Time)
Recorder Point = Avg. Daily usage x Avg. Lead Time (in days) + Safety Stock
Benefits:
- It Automates the reordering process and minimizes manual intervention
- Ensures that inventory levels are maintained to meet demand without dipping unnecessarily into the safety stock.
Economic Order Quantity:
EOQ determines the most cost-efficient order quantity. It balances holding costs and ordering costs to minimize total inventory costs.
EOQ Formula:
- EOQ = √(2DS/H)
- D: Demand in units per year
- S: Order cost per purchase order
- H: Holding cost per unit per year
Benefits of EOQ:
- It minimizes total costs associated with ordering and holding inventory.
- EOQ helps maintain a balance between having too much or too little stock.
Just In Time Manufacturing:
JIT is a strategy that aligns inventory deliveries with production schedules, reducing wastage and storage costs. This system ensures materials and components are delivered just in time for production.
JIT & Inventory Cost Reduction:
- It reduces the inventory management cost by minimizing the amount of inventory held at any given time.
- It streamlines production processes and reduces lead times.
- JIT minimizes overproduction and excess inventory.
Find Additional Suppliers:
Exploring new suppliers can lead to cost savings and better terms. Conducting regular market assessments ensures you get the best deals and services around.
How to Find New Suppliers?
- Market research will help you spot new suppliers and compare the prices.
- Negotiate better terms and discounts based on volume and long-term relationships.
- Assess potential suppliers based on reliability, quality, and cost-effectiveness.
Bundle Slow-Moving Items:
This strategy allows bundling slow-moving items with popular products. Practicing bundling slow-moving items with popular ones helps shift less popular stock. This strategy also involves creating attractive packages that combine slow-moving items with high-demand products.
Practicing Bundling:
- USE FSN analysis to identify slow-moving items.
- Combine slow-moving items with fast-moving products in attractive bundles.
- Run promotions to incentivize customers to purchase bundled products.
Centralize Purchasing:
Centralizing purchasing helps avoid the bullwhip effect, where small changes in demand at the retail level cause large fluctuations in orders up the supply chain. Centralized purchasing provides visibility over the entire operation, enabling more accurate inventory management.
Benefits of centralized Purchasing:
- Prevents overstocking due to misaligned purchasing decisions.
- Uses centralized data to make more accurate forecasts and purchasing decisions.
- Ensures consistent and coordinated purchasing practices across the organization.
Using a Third Party Logistics Partner
The third-party logistics helps businesses scale by offering them services such as inventory management. This is particularly helpful for small businesses with limited resources. Partnering with a 3PL can significantly minimize inventory management costs by outsourcing warehousing and logistics.
Why 3PL?
- It reduces costs associated with warehousing, labor, and logistics.
- Provides flexibility to scale operations up or down based on demand.
- Allows businesses to focus on their core competencies while the 3PL handles logistics.
Consignment Inventory:
Holding and selling inventory on behalf of another company is called consignment inventory. The supplier places the products in retail stores, and payment is made only when the products are sold.
Benefits of Consignment Inventory:
- Allows suppliers to enter new markets without upfront investment.
- Provides excellent exposure and visibility for products in retail settings.
- Suppliers and retailers both share the risk, as the payment is associated with the product sale.
Setting Inventory Key Performance Indicators:
Setting KPIs for inventory management facilitates tracking performance and identifying areas for improvement. These KPIs include metrics such as inventory turnover, carrying costs, and supplier performance.
Common Inventory KPIs:
| Inventory Turnover | Measures how often the inventory is sold and replaced over a certain time period |
| Carrying Cost | Tracks the cost associated with holding inventory, including storage, insurance, and obsolescence |
| Supplier Performance | Assesses the reliability and quality of suppliers based on delivery times and product quality. |
Joint Procurement
This strategy involves partnering with similar businesses to streamline the procurement process and benefit from bulk purchasing. It’s a great way of cost saving and improving efficiency.
Steps for Implementing Joint Procurement:
- Find businesses with similar procurement needs.
- Establish agreements that outline procurement processes, responsibilities, and benefits.
- Regularly review the performance of joint procurement initiatives to ensure they meet expectations.
Cross Docking Services:
Cross docking is a logistics strategy where goods are transferred directly from inbound to outbound transport with minimal storage time. This is an ideal strategy for businesses with high turnover or time-sensitive goods.
Benefits of Cross Docking:
- Reduces the time products spend in storage, speeding up delivery times.
- Reduces the need for storage space and thus minimizes the warehousing cost
- Streamlines the distribution process, enhancing overall supply chain efficiency.
Cloud Inventory Management Software:
It’s the need of the hour. Investing in cloud-based inventory management software can significantly reduce long-term costs. This software provides real-time visibility and tracking of inventory, facilitating efficient inventory management.
Advantages of Cloud Software:
- Requires minimal upfront investment and offers pay-as-you-go subscription models.
- Provides real-time data and insights, enabling better decision-making.
- Can integrate with other business systems, enhancing overall efficiency.
Conclusion:
Implementing these strategies can help businesses optimize their inventory management processes, reduce costs, and improve overall efficiency. By leveraging modern techniques and technologies, companies can maintain a competitive edge and ensure smooth operations in the supply chain.
