• Excess INVENTORY is the CURSE of many companies.
  • In order not to lose substantial funds INVENTORY has to be Managed.
  • To start with good FORECASTING from Retail right through to Raw Material.
  • Crucial are accurate inventory figures.
  • The quality of inventory is of crucial importance.
  • Theft can be a major problem.
  • Long lead times of components also adds to complexity. This can be reducedby requiring in plant dates.
  • You either have TOO MUCH or TOO LITTLE. It can cost your much more than you expect.
  • We only charge if we create a saving – no saving no charge.
  • Most companies forecast poorly. The level of inventory is directly proportional to the inaccuracy of the forecast. The tendency is to hold too much which creates less shortages.
  • The worse your forecasting is, the more extreme your inventory will be. It is likely to be too much rather than too little.
  • Good inventory figures makes it easier to manage it.
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AN AREA TO WATCH

Oversupply from people who you order from. They are reducing their stock and increasing yours. Your Forecasting may be good but if you are booking in more inventory than you have ordered then all your effort to have good figures is wasted.

Classification of Inventory

Broadly speaking there are two main categories of inventory:

direct – the usage of the item can be quantified to the end product. This may be a door handle.

indirect – just the opposite of the above – it cannot be related to the end product in anyway. This may be floor polish.

In a way assets are also a form of inventory where their costs can be negotiated.

INVENTORY REDUCTION will create an improved cash flow. It will save money. There is also the MOVEMENT of inventory which will be reduced which also means reduced costs. To move 500 pallets instead of 1000 pallets create a saving in indirect costs.

What Does Inventory Reduction Mean?

Let’s first remind ourselves of the objective of inventory management: to keep enough inventory to meet customer demand while also remaining cost effective. Inventory exists to meet customer demand. With the ever-changing business environment, controlling cost has not always been on the top of the list of priorities. In the past, companies maintained a steady level of inventory because competition was low. Now, more competitors and a growing market with rapid changing products and features cause inventory prices to rise.

Inventory levels are reduced to save on costs, decrease on lost profit, and free up money for other operations in your business.

Think of it this way, if you’re trying to make big money you would never invest everything into one source. You need to diversify your portfolio to succeed. The same principle is applied to inventory reduction. If you want to make profits, don’t put all of your cash flow into inventory. Inventory reduction is performed for a number of reasons. Here’s a few signs of high inventory levels that you may be experiencing.

Inventory can be so oversaturated that some of it becomes obsolete before it’s sold. This can occur when there is a substantial change to a product and people no longer wish to buy the old product.

When customer demand is forecasted incorrectly, unsold inventory is accumulating. As a result, more expense is needed to expedite products in short supply.

How to Reduce Inventory Inventory reduction is performed to reduce costs in several areas, like:

Good Forecasting

In order to reduce inventory, companies must formulate an inventory strategy first. Without a strategy in place, your company could see themselves with a surplus or shortage of inventory. Good forecasting is one of the key tools in any organization. It must also be regularly updated.

Reduce Inventory Cost

Excess inventory inflates extra storage space costs. When you hold more inventory than what is needed, you’re paying for the space and resources to hold that inventory. You’re also paying for labour and transportation fees to move the stock around. That’s a lot of rental, storage, and labour fees going towards unused stock and lost profit.

If you can reduce inventory, you’ll have more space for inventory that’s more likely to sell faster. Reduced inventory also means less money allocated towards workers to handle excess inventory. You can focus your efforts elsewhere and in a warehouse that is appropriately sized.

Flexibility

In an age of constant technological advancement, it’s irresponsible to order vast inventory quantities. You have to be flexible in the amount of inventory you order because product lifecycles become shorter and shorter each year. If you order too much of a product that will become obsolete in six months, you’re left with unused inventory taking up space in your warehouse. Reduced inventory per product lifecycle is the key to success.

Additionally, the way people shop continuously changes.

For example, as brick-and-mortar stores become obsolete in favour of strictly online sales, you want to have enough free cash flow to accommodate a change in infrastructure. That means having enough money to do things like build a website and purchase online advertising without having all your money tied up in inventory. With reduced inventory ordered on an as-needed basis, your company can be ready for industry changes at a moment’s notice.

Reduced Waste

Unused inventory is waste. When you order too much inventory and it just sits in your warehouse, not only do you lose profits, but you are forced to find ways to get rid of it. If you mark down the items in a fit of desperation, your customers will become accustomed to that price reduction and expect it in the future. This can be hard to overcome.

If you’re working with perishable goods, they will literally go to waste if not used quickly. And not to mention the negative effect throwing away mounds of unused inventory takes on the environment. Reduce your inventory to reduce waste and overall inventory costs. Spend the freed-up money on goods to replace the unused waste or just improve your cash flow

Why Inventory Buffers Are Important

Part of that inventory strategy is implementing inventory buffers. Inventory buffers are an important pre-emptive measure to take when controlling inventory quantities.

Buffers should be set between production stages to prevent problems along the supply chain, like excess inventory orders. When you set buffers, you will reduce the risk of not only over ordering inventory, but also overselling and underselling items across marketplace channels.

The size of a buffer is related to the reliability of the company supplying you as well as the damage that occurs to the item in the factory.Buffers are an important feature of inventory management, as well. Buffers are supplies or products kept on hand in case demand or supply chain fluctuations ensue in the future.

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The following paragraphs are examples of ways to reduce inventory so that buffers can be kept as a safety measure.

  • Improve supply chain management
  • Avoid excess safety stock
  • Consolidate your supplier base
  • Demand forecasting
  • Shorten the product lifecycle
  • The ABC system
  • Centralize inventory

The phrase ‘better safe, than sorry’ aptly applies to reducing inventory in supply chain management. Because inventory costs are high, if companies can catch and reduce inventory costs at various stages along the supply chain, the end result is rid of uncertainty

Some of these uncertainties can be created by a company or supplier’s poor quality, or in the form of late delivery times, unstable production schedules, or fluctuations and poor forecasts in customer demand. By streamlining the supply chain as a whole, not only can a company reduce inventory, they also speed the time to market, shorten cycle times, decrease costs, and free tied up cash.

Don’t Neglect Customer Service

It’s typical of customers to expect retailers of any size to always have plenty of whatever item they want at all times. The term ‘sold out’ is not acceptable.

It should most definitely be a company’s objective to provide a high level of customer service, however, that concept often comes with the assumption that a company should maintain large quantities of inventory at all times.

As you have learned by now, carrying large quantities adds up in storage costs and carrying costs. Obviously, this is not ideal. Businesses can still practice inventory reduction without sacrificing a level of customer service. It’s imperative to understand your customer’s needs. If they’re okay with receiving products in half shipments, go for it.

Overall, if you can provide excellent free shipping and returns, prompt customer service, and quality products, for example, customers won’t place so much emphasis on a never-ending supply of inventory.

Summary

So we are in the INVENTORY REDUCTION game. Our task is to safely reduce inventory. Hopefully you’re scrambling to rethink your inventory management situation if any of these scenarios sparked concern. If not, it’s still not a bad idea to think ahead and get smart. After all, smart inventory management is all about running an efficient and automated business with less inventory to better plan for the future. Be nimble in business and only purchase what you absolutely need.

As a final piece of advice, remember these parting words of importance:

  • Reduced inventory allows you to adapt and adjust to rapid market and industry changes, like short product lifecycles.
  • Reduced inventory saves your business carrying costs, storage costs, and transportation costs between warehouse facilities.
  • Inventory reduction eliminates obsolete stock, which if not sold under dire circumstances, will go to complete waste and cash flow down the drain.
  • If you want to succeed, don’t put all your eggs in one basket. Diversify.

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