Inventory Cost Reduction Case Studies

Every organization is looking at ways to intelligently reduce costs – without creating an undesirable level of risk. One of the key focus areas in MRO cost reduction is always procurement and inventory cost reduction, where opportunities for optimization exist in virtually every company. It’s only a question of whether you can actually identify them, how well and quickly you uncover them and how fast you can implement the changes that can deliver tangible savings. You may be surprised by how dramatically physical changes to a warehouse or store can reduce holding costs.

inventory cost reduction

Your warehouse could be better utilized by holding stock that is selling well instead of having valuable space taken up by poor-selling products. The carrying cost of inventory refers to the cost of storing and handling the inventory. This can include warehouse rent, taxes, insurance, security, transportation, and much more. Learning how to reduce inventory management cost is an important part of keeping your business in the black.

Minimize Inventory On Hand

For example, if lead times are long or continually fluctuate, you’ll need to carry more safety stock to cover the risk of run-out while you wait for your delivery. Naturally, we want you to be totally prepared for the upcoming battle with your professor. If you need to fill the gaps in your knowledge, you can always ask for clarifications related to your paper.

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  • This caused visibility challenges of the inventory, and therefore led to erroneous decision making, most often having excess.
  • However, maintaining inventory also involves holding or carrying costs along with opportunity cost.
  • Companies use a lot of resources making sure that they have the right Inventory levels.
  • Every products-based business must have cycle inventory, or working stock, to keep up with customer demand and generate sales.
  • When this important aspect is overlooked, things can quickly spin out of control.

We can find you the right supplier to help you start or grow your business. It enables you to achieve better profitability and pursue new opportunities, and make your venture much easier to run. This curbs wastage unlike situations where you order stock in advance, hold it, and then suffer the consequences of fluctuating demand. Enable you to get more accurate and up-to-date inventory data to curb inventory shrinkage. While these costs are often unavoidable, it is best to always keep them as low as possible. Customers get more value at a bargain and you get to sell off your stock.

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inventory cost reduction

You’re also paying for labor and transportation fees to move the stock around. Inventory levels are reduced to save on costs, decrease on lost profit, and free up money for other operations in your business. Despite reservations, that statement is in fact not only correct, but could also be the solution to your inventory cost problems. Inventory reduction provides a number of advantages and solutions to a business . Unleashed Software, the Auckland-based inventory management Software-as-a-Service provider, has announced record sales a…

If a company is constantly focused on moving excess stock, it’s likely not innovating and brainstorming ways to, for example, add a feature or new product requested by customers. Businesses can find themselves stuck in this loop if they’re consistently carrying too much inventory. Optimizing stock levels will free up resources for research and development. Inventory carrying costs are a crucial metric that helps determine whether you’re running an efficient operation.

FAQs about Inventory Reduction

These are goods a company no longer believes it can sell and that are often written-off as a loss. Dead inventory may linger in a distribution center or the back room, quietly and continually raising inventory carrying costs without leaders even realizing it. Stocking just enough product to cover expected need can be a risky proposition. That’s why most companies carry some safety stock, or extra inventory to cover unpredictable events like a surge in demand, an unexpected supplier delay or a damaged shipment.

inventory cost reduction

Outstanding customer service creates a good reputation for your business, makes customers feel valued, and builds customer loyalty. It increases the chances of customers coming back to buy more or recommending your business to other buyers. A poorly planned warehouse complicates inventory handling procedures, makes it difficult to organize or locate inventory, and generally promotes inefficiency. Optimizing the warehouse layout to support efficiency and drive down your costs. In contrast, overly low stock levels may also leave your warehouse resources idle which means it will be running at an inefficiency. Avoid using sales as your only key metric for demand forecasting.

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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 benefit of broader exposure is a key reason this strategy is used. Under this model, a supplier can enter new markets or areas without the need to invest in local manufacturing. But it does come with some risk given the product has been delivered to a retail store without payment having been received in advance. It relies on a good relationship between the supplier and the end seller, which can become strained if the product doesn’t sell as expected. You can use FSN analysis, discussed above, to identify which products can be classed as slow- or non-moving stock, and then take action to shift the products on. Bundling is one way you can get creative to shift slow-moving stock.

Cost Reduction in Inventory Management: 5 Ways to Do It

Accurate inventory and production planning is built on not only accurate data, but people who can effectively analyze and interpret that data. Employees must be able to spot trends in the numbers and interpret the impact. Leaders must also account for how industry trends or broader economic shifts could affect demand for its items. Please also note, the review of safety stock goes hand in hand with ABC analysis for your business.

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Once we have this base data in the format that can be analysed, we can only then get into inventory optimization, and eventual via several techniques. This technology will also establish consistent receiving, putaway and fulfillment processes that ensure each item is traceable from the time it enters your warehouse to when the customer receives it. Inventory management software empowers companies to be proactive—they can adjust purchase orders, sales strategies, warehouse layouts and more to address problems early on, before costs pile up.

In-transit Inventory

Reducing product stock frees up your funds, storage space, and other business resources. It allows you to explore other better-selling products in your niche if you wish to or even develop private label products. Adequate inventory level is essential to the supply chain of every business. It makes cost reduction strategies it possible for you to keep up with customers’ orders and should tide you over until the next delivery from your supplier. Labor and the number of “touches” a product requires—from putting it in a warehouse bin to printing a shipping label—is a big part of the money spent on material handling.

Excellent quality, perfect grammar, delivery on time, nice support team, pleasant prices, amazing results. Log in to your personal account to know the current status of your papers. From supply chain snarls to additive manufacturing to tests of manufacturing knowledge, the most popular material from IndustryWeek in 2022 reflects this audience’s eclectic set… Our consulting team developed a customized data schema for the Client and defined data governance rules which would be implemented across the Client enterprise. Learn how we transformed inventory optimization for a mining major in the US. Higher restocking costs – ordering smaller batches of inventory can result in higher costs due to frequent shipping, lower bulk discounts, and other logistical expenses.

With an inventory optimization tool you have the ability to optimize your inventory levels, so you have enough stock to meet upcoming demand, without building-up a surplus. If you’d like to understand more about the ‘health’ of your inventory, contact our experts who can carry out a stock health analysis. We’ll profile your current demand patterns, identify your top 25 excess inventory items and show you where you can cut back investment. Keeping inventory costs low is a challenge all businesses have to deal with in a way or another.

ways to approach cost reduction in inventory management

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KPIs can consider factors like turnover, costs, relationships with suppliers, and other metrics. By setting realistic targets and tracking how the business performs, you can see what may need improvement. As a general rule, setting KPIs across all aspects of your business helps maintain momentum and ensure accountability of performance and delivery. In this scenario increases in demand are passed down the supply chain, and the biggest impact is felt by those at the farthest end – suppliers of raw materials. Using this calculation on an ongoing basis to order stock will ensure you can meet demand while also minimising holding costs. Splitting stock into these three categories makes it easier to identify issues and concerns around consumption, usage and quantity held in storage.

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