Inventory reduction is one of the most pressing issues for many manufacturing companies. Holding a lot of inventory in warehouses is the major reason of reduction in working capital for an organization and most of the times the main cause of huge losses for the businesses.
Many companies in today’s working model, hold extra inventory as safety stock to drift away from emergency situations where delay in product delivery can cause huge business losses. But if these safety stocks are not stored in a calculated manner, it ends as huge inventory backlogs which creates useless and outdated stock up in the warehouse. Due to these outdated items in stock, companies have to either sell them in promotional offers or discard them completely. In both the cases, organisations end up incurring huge losses due to these excess inventory storage and wasting their working capital on something completely useless in business revenue cycle.
Reason for high Inventory levels?
There are many companies which support the concept of excess inventory and the uses of it in emergency situations but in most cases, higher inventory levels are major reasons for incurring losses for organizations. Let’s understand some of the reasons for the high level of inventory in warehouses and the disadvantages of having them.
Increase in lead time
Many companies face this issue of delayed raw material delivery from suppliers due to numerous reasons, which causes organisations to store excess inventory as safety stock to unblock them from these supplier delivery issues. These delays not only increases the transportation and overall inventory holding cost but also cause many product delivery issues to the end users. These daytoday issues in increased lead time cause distressed customers and bad client experience.
Variation in demand supply chain
With cheaper products available online and foriegn inroads of new product varieties, many manufacturing companies face a huge variation in demand supply chain for usual stocks. In most of the cases, many ordered stocks remain unsold due to other competitive products in the market and lower rates on international websites. In the longer run, these unsold products either remain stocked up in the warehouses or gets sold on promotional rate, which in either case is a loss for the organization capital inflow.
Improper Inventory forecasting
Demand forecasting is a very critical part of inventory planning. If done inefficiency can cause a lot of un-demanded stocks to be ordered repetitively from the suppliers which end up being unsold and queued up in the warehouses. Futuristic view on the various product requirements is very important to maintain a proper balance in our demand supply chain.
Inaccurate demand forecasting will lead to the carrying of too much stock or very little stocks. Poor inventory forecasting is due to not having proper tools for the job example you lack demand forecasting software or you are trying spreadsheets for solving complicated calculations.
Changing customer trends
With new options in hand, customers tend to order different variety of products through various vendors and organizations to understand their customer support and business model. These varied customer trends are difficult to understand and predict in the long run of supply chain cycle. Hence, today’s organization either stick with old customers and try giving 100% productive results to avoid customer attrition or try to gain new customers who have a stable shopping trend in past, so that their shopping behaviour can be correctly understood and relative inventory can be ordered as per their demand requirements.
Returned and damaged product delivery.
Major disadvantage of flexible demand and supply chain is that usually many customers return their goods due to various reasons. Some customers simply reject the whole batch of products if the shipment is delayed by some hours or due to some minor misunderstanding. These returned and dangling products which are specifically made for any organisation remain in the warehouse as excess stocks as these cannot be sold to open market due to policy restrictions and other legal obligations. These old and unused stocks cost a bounty to the production company and can cause major reason for loss.
Now we understand that excess of inventory can be due to many reasons but the side effect of it is majorly seen on the working capital for the organization, which gets restricted with these excess stocks sitting in the warehouse and not being used for active sales cycle.
Let’s understand some of the strategies which can be implemented to reduce these high levels of inventory in our warehouses and make way for more profitable business model.
Benefits of Inventory Reductions
There are numerous advantages of inventory reduction, some of them are listed below:-
- Lower Costs
- Less working capital tied up in inventory.
- Lesser investment in warehouse spaces.
- Lower insurance costs as the risk factor is reduced.
- Less wastage cost due to expired or out-of-date products.
- Less Labor
- Reduced labor for inventory tracking.
- Less labor for warehouse maintenance and upkeep.
- Security requirement reduced due to smaller warehouses.
- Improved Quality
- With a consistent amount of raw material requirement, quality and maintenance of final products is improved.
- Wastage and damage due to expiry is reduced, hence customers get fresh stock items.
- Material Maintenance
If you are retaining more storage space or large warehouse for the large inventory, reducing the inventory level might result in lower cost. Excluding the rent of the warehouse, the savings will include the labour to stock, track and verify your inventory.
- Price Competitive
If you are working in an area where there is more competition, savings from reducing the inventory will help you to price your products or services more competitively. The additional contracts you obtain will also help you to increase the exposure in the business community. So that you will become a recognized leader in the industry in your region.
- Increased profit
The lower expenses from reducing inventory will help to increase the profit in the business. A corporation that issues stock might be chosen to increase the payments to its investors, meanwhile, the partnerships may choose to reinvest in the business or take more profits.
Strategies for Inventory reduction
1. Inventory Auditing
Many companies follow once a year auditing strategy which results in the end of year analysis of the maintenance and stock counting results. Usually most of the products get reordered continuously without any regular audit. These repetitive ordering results into overstocking of out of demand and outdated products.
Regular period of inventory auditing and routine checkup of the inventory helps in understanding the requirements of reordering of the products. Once the auditing system is in place, organisations find it very easy to maintain their products with a systematic process and can avoid any excess stock cluttering.
Before reducing inventory, it is very important to examine the products which are offered and determine whether few products must be discontinued. These items will have high demand, high production and holding costs. Eliminating those kinds of items will reduce the inventory levels and reduce your costs.
Read More – 4 Reasons for Carrying Safety Stock Inventory
2. Enhanced Demand forecasting
Demand forecasting is a challenging component within a demand supply chain. Considering we live in a technology rich world, where every second a new technology and product is avaiable for customers, understanding every product demand in the market is very important to have a sustainable business model. Consistent analysis and systematic view of product demand trends help organisations to understand the current requirements of a product, based on which the reordering process can be maintained for inventory management.
Various demand forecasting methods can be implemented as per the requirement of a particular manufacturing sector, which can help in striking a balance between sales and demand of its product.
Automated features of SalesBabuCRM inventory management software helps in forecasting the demand of various products through metrics which will let you know when you’re low on stock, your best-selling items, your worst-selling items, and trends in demand. This helps in better inventory planning and reordering of your stocks and maintaining an adequate amount of inventory in your warehouses.
3. Just in time Inventory system
Just-in-time inventory (JIT) management is an inventory management strategy where organizations store almost no extra inventory in their warehouses, instead, order everything they need for manufacturing their products at the realtime and exhaust them at the end of the production cycle.
This process of just-in-time inventory management, considerably reduce the cost of inventory storage but is not easily implementable for every business model.
Just in time inventory management is very useful for retail business where the stock have a real time outflow and suppliers are ready to provide multiple time delivery.
4. Reduce Lead time
Lead time reduction is the process of reducing the time for raw material and other purchase delivery. The shorter the lead time is , the better the inventory planning can be done.
Lead time reduction helps in inventory cost reduction in following ways:
- It allows you to keep less safety stock inventory – With consistent delivery cycle, less obsolete stock needs to be stored for future requirement.
- It allows you to order less stock more frequently – When the delivery cycle is consistent, firms can order less stock at the time and reduce the cost of inventory storage.
5. Get Rid of Obsolete Stock
Many companies prefer to store a huge pile of stocked up products due to various reasons like precautionary inventory planning, handling out of stock scenarios, keeping stocks for competitive market cases etc. In this scenario, a lot of stocks gets collected and increases the maintenance cost of warehouse, insurance and many other investments.
Traditional inventory management model, stack up a lot of outdated and out of demand products which have no market value. These products often results in zero income scenario and incur huge losses for the organizations.
Getting rid of obsolete stock in regular interval using product bundling to sell more of old stock or discounting them individually on offers help to earn minimum returns on the old and outdated products.
Also, when this cluttered old stock is cleared up, you can invest and make room for fast-selling products and earn better revenues for the organisation.
A cloud-based inventory management system like SalesBabuCRM is the best fit for any inventory tracking tool. It can help you to know your reorder timelines, streamline your stock intake, reduce your lead time, and deliver accurate metrics for better demand forecasting.
The better your inventory management tool is,the more profit you can make for your organization.