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Real-Time Payments: A Business Game-Changer

Posted by Michael Noble - 19 May, 2022

5 Effective Ways to Reduce Inventory Costs

Managing inventory is still a challenge for small and medium businesses, which struggle with keeping costs under control in this field. Whether you’re a restaurant owner, a small manufacturer, or a web shop owner, you need to take a closer look at your inventory if you want to lower your costs.

A high level of inventory and poor turnover can influence business efficiency. It’s not just about the money you block in your inventory, but also about the costs of owning space, insurance, maintenance, operational controls, to mention a few.

An efficient inventory management application, custom-made for your business, can help you control your costs better. Check these five effective ways to lower inventory costs, to make the most of your capital:

1. Track All Inventory Costs

More than half of companies prefer to estimate instead of determining the exact inventory carrying costs. Besides the obvious expenses with rent, maintaining the warehouse, and paying the employees who manage the inventory, you should consider hidden costs.

Such as:

  • Costs of capital - the money you’ve used to buy the things in your warehouse and that don’t have any ROI yet;
  • Costs of deterioration and obsolescence;
  • Taxes and insurance;
  • Administration costs - what you spend on data entry and bookkeeping;
  • Out of stock costs - the loss caused by missed sales opportunities due to poor inventory.

These costs vary with the size of your business, the industry and the geographical area where you develop your activities.

inventory Control to reduce costsSource

As a guideline, carrying costs of inventory are between 20% and 30% of the purchasing price.

Yet, the numbers can grow bigger in some industries.

2. Optimize the Order Management Process

The order process in an essential part of the inventory management. In a nutshell, managing the order process refers to keeping track of orders and organizing all the data about your customers.

This way, you know what quantities you need in your warehouse to fulfill all your orders in time to meet your clients’ expectations.

inventory Process ControlSource

Depending on your industry, you can partner with suppliers that can deliver based on your current needs. This way, you manage to keep stocks under control and reduce the lifespan of your stock in the warehouse.

For example, if you can reduce the inventory coverage from four to three weeks, you can save significant money for your business.

3. Manage Excess Inventory

Excess inventory is a perpetual source of extra costs. In most cases, it brings more expenses than what you could gain with long-term storage. Do the math and, if the excess stock costs your business too much, find a smart solution to remove it from your warehouse.

Excess-Inventory-costsSource

Here are some practical ways to reduce excess inventory:

  • Return it - depending on your relationship with your suppliers, you may get a refund, a discount of credit for your next order. The only challenge in this situation is covering shipping costs, but it can result in a smart investment.
  • Trade with your competitors - they say keep your friends close and enemies closer. In business, you can use this to solve excess inventory issues. Find a competitor that could use your stock and see if you can find something you need in its warehouse for a fair exchange.
  • Contact a liquidator - it’s not the most economical solution, as you generally sell the stock a lot under the market price, but it’s always better than adding inventory costs.
  • Use it for different products - if you have multiple plants, check if any of them needs your inventory. This way, you recover most of your investment (minus the transportation costs).
  • Donate it - in this situation, everybody wins. In fact, many important manufacturers and retailers donate excess stocks, which helps them keep costs low while helping people in need.

4. Make Data-Driven Decisions

In the digital era, inventory management is easier thanks to apps and specialized software. When you automate processes in this sector of your activity, you’re not only making your business more efficient, but you also collect important data for future predictions.

Many inventory management software give you in-depth reports about movements in your warehouse, providing innovative solutions to optimize your investment in stocks. Predictive data analysis allows you to make better decisions - based on past operations, you can estimate the correct size of your stocks. This way, you don’t order too much and, at the same time, you don’t risk being low on inventory.

Lower shipping costs reduc inventory costs

5. Lower Shipping Costs

Just like excess stocks, shipping can add up significant costs to your balance. Between what you pay to have your inventory in your warehouse and the costs of shipping goods to your customers, you’ll end up with a lot of money leaving your accounts every month.

Try to negotiate multiple carriers, to find better deals. Many shipping companies give special discounts based on volume, so if you can combine shipments to trim your costs.

Better than that, you can try to take advantage of possible association discounts. Check if there’s an arrangement in your industry that can obtain smaller prices for your business and see how can you drag benefits from it.

The Takeaway

Keeping inventory costs low is a challenge all businesses have to deal with in a way or another. You need to invest in an inventory management system that can help you to analyze all your expenses and to optimize your processes as you move forward with your business.

You need to use the data you have to estimate the right quantities of stocks you need to fulfill all orders. In the same time, you need to come up with innovative solutions to cut costs due to excess inventory. Keep these tips in mind and your business will be better for it in the long run.

Topics: Management


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