5 Ways to Reduce Inventory Costs
You have two main options if you want to boost your company’s bottom line. You can increase your earnings, or you can reduce your costs. In some cases, doing both can be the best option. If you want to reduce costs, one place to look is at your inventory. The products your company sells allow it to earn revenue, but the cost of storing those products and shipping them from one place to another can eat into the profit. Knowing what sells and when it sells can help you get your inventory costs under control, as can keeping tabs on every product and only ordering new products when necessary.
Why Reduce Excess Inventory Costs
How do companies reduce inventory costs? And why should your company focus on it instead of increasing earnings or other methods of improving your bottom line? Inventory incurs multiple costs. You need to pay to store the inventory in a warehouse or multiple warehouses. Having an excess of a particular product can mean that you don’t have the space available to store newer items or seasonal products. Depending on the type of products you sell, there is a chance that the items will spoil or expire before you can sell them.
Having high inventory costs can also disrupt your company’s growth goals. If you pay a lot to store excess inventory, your company might not have the funds it needs to move into a new market or introduce a new product line.
How to Lower Inventory Costs
Your company might try one method of lowering inventory costs, or it might try several, as there’s no one-size-fits-all solution. The key to getting your costs under control is being strategic. Try one method first and gauge the results, then try something else to reduce your costs further or if you aren’t happy with the results of the first option. Using inventory management software can help you with inventory cost control without requiring a lot of time and effort from you or your employees.
5 Ways to Make Inventory Costs Cheaper
Lowering your inventory costs can require a single or multi-pronged approach. Here are five things to try if you want to lower your inventory expenses.
1. Keep Track of All Costs
Ignorance isn’t bliss when it comes to the total cost of your inventory. How much is your business spending on purchasing products to sell? What does it spend on storage for its inventory? Ideally, you should have a clear idea of the exact amount you’re spending each month, so you can figure out where to make cuts. In addition to the cost of the goods you’re selling and storage costs, some other expenses to track include:
- Insurance costs
- Obsolescence or expiration costs
- Shrinkage costs
- Bookkeeping and data entry costs
- Staffing costs
The cost of keeping inventory on hand is usually called inventory carrying cost. The average inventory carrying cost is 20% to 30% of the inventory’s value, and the higher the carrying cost is, the more it eats into your bottom line and affects your cash flow.
2. Reduce Shipping Costs
No one likes to pay for shipping, which explains the demand for free shipping when people shop online. If the customer isn’t paying for shipping, though, someone else is. That someone might be your company. Along with the cost of shipping your product to your customers, you also want to account for the cost of having items shipped to your warehouses or your stores.
You have several options if you want to lower the cost of shipping. It can be worthwhile to negotiate with the shipping companies your work with to see if they will give you a lower rate or offer a discount for bulk shipments. You can also reduce the cost of the packaging you use to ship products. A shipper might offer packaging for free, or you can look for cheaper alternatives. Pay attention to the size and weight of the packages you use, too. The smaller the package, the less it will cost to ship. Packing inventory in oversized boxes wastes packaging and costs your business more.
If you pay to ship products to your warehouse, see if the manufacturer offers shipping discounts. Depending on the products you sell, the companies that produce them and the overall cost of shipping, it might be worthwhile to change vendors or manufacturers to lower your overall costs.
3. Learn How to Reduce Overstock Inventory
How much inventory do you keep on hand “just in case,” and how much is that inventory costing your business? Keeping excess inventory on hand costs your company in several ways. There’s the cost of storing that inventory, the cost of purchasing products that might not sell and the cost of spoilage if those products expire or go bad before you sell them.
If you have too much inventory taking up space in your warehouse, you can reduce it in a few ways. One option might be to return it to the supplier or manufacturer, getting a refund or credit for the excess product. You can also deeply discount the products to clear them from your storage shelves, making room for new inventory. Discounting overstock inventory can affect your profit but might be the best option if items are languishing and won’t sell otherwise.
Moving forward, consider ways to keep your excess inventory to a minimum. You might try just-in-time inventory management, which eliminates safety stock completely. Another option is to find suppliers that have shorter lead times. If your company is running low on an item, you know that you won’t have to wait as long for the supplier to send it to you, so you can feel more comfortable ordering fewer units of each item at a time.
4. Optimize Your Order Management Process
When’s the best time to place orders to reduce the chance of stock-outs and minimize the need to store too much product on warehouse shelves? Optimizing your order management process helps reduce inventory costs associated with canceled orders and with keeping excess products on hand.
One way to optimize order management is by using a software platform that automates purchasing and replenishment. When stock levels drop below a certain amount, the software automatically creates a purchase order. The software can also give you a clear idea of the cost of the products you sell, which can help you choose the inventory you carry in the future.
5. Use Data to Inform Your Decisions
Data, such as sales figures, can help you decide what types of products to continue to sell and which ones not to order again. Your data can also help you see if you should order more of a specific product or if you can get a better price for it if you order it at a particular time of year.
Although you can’t guarantee that sales will be the same one year to the next, the data from an inventory management system can help you make better decisions that keep your overall inventory costs down.
How Finale Inventory Can Help With Inventory Cost Control
The first step toward getting inventory costs under control is to use an inventory management system. Finale Inventory is a cloud-based inventory software platform that lets you see what past sales have been and what your current stock levels are. You can use the software to manage stock at one or more warehouses and streamline reordering products when necessary. The platform integrates with multiple sales platforms and marketplaces, letting you track inventory and sales at multiple locations, reducing the risk of overselling and stock-outs.