Blog Inventory 10 Practical Ways You Can Reduce the Cost of Inventory
05 September, 2023

10 Practical Ways You Can Reduce the Cost of Inventory

Many people view cost-cutting as a reaction to economic challenges like rising prices or decreasing consumer demand. In reality, cost optimization is a smart way to build a competitive advantage and set your business up for long-term success.

However, for 70% of businesses, the main reasons behind reducing expenses are generating long-term efficiency and enabling business transformation and growth. In fact, less than 25% of companies said that economic conditions motivated them to cut costs.

So, the question becomes, where to focus your energy?

The best cuts to make are in areas that already cost you a lot of money, and inventory is one of those. Keep reading to learn 10 practical ways to reduce inventory costs, operate more efficiently, and create opportunities for business growth.

What is the cost of inventory?

Inventory costs include all the expenses surrounding your products, including purchasing, assembling, storing, and holding excess stock you haven’t sold yet. As such, inventory costs refer to more than just the price of the products themselves.

Examples of inventory costs include:

  • Transportation and handling
  • Purchasing costs
  • Obsolescence
  • Insurance
  • Security
  • Labor
  • Taxes

While inventory is vital, it’s also a source of many unnecessary expenditures, such as storage costs for excess products you can’t sell or price premiums for expedited shipping to avoid stockouts.

By focusing on inventory cost reduction, you can improve your business’s operational efficiency, increase profit margins, and boost your bottom line. Let’s take a look at how.

How to reduce inventory costs

Here are 10 strategies to cut inventory costs and improve overall efficiency. Even focusing on one or two methods will enable you to reclaim your cash flow and increase profits.

1. Avoid minimum order quantities

A minimum order quantity (MOQ) is the smallest amount or number of a product a company will supply. MOQs are commonly used by suppliers and manufacturers to unload more of their inventory on retailers and wholesalers.

Suppliers might offer deals to sweeten their MOQ, like “buy 50 items and receive 10 free.” While it sounds like a good deal, you may end up with excess inventory you’re paying to store because it doesn’t sell.

The good news is there are a few ways you can avoid the MOQ trap, such as:

  • Pooling cash with a fellow business owner who needs the same stock and splitting the inventory items.
  • Offering to pay your supplier a little more money for less inventory. You may pay a bit more upfront but save money later on by reducing inventory holding costs.
  • Build a relationship with your supplier and negotiate a deal to eliminate the MOQ without any added cost.

2. Know your reorder point

A reorder point is the optimal stock level at which you should place your next order. The right reorder point helps you reorder the right amount of inventory in time to meet customer demand. As such, you can reduce costs associated with both dead stock and stockouts.

You can use our reorder point formula guide to help you find that sweet spot for inventory replenishment.

3. Improve warehouse organization

Unorganized warehouse space can be costly because it increases travel expenses and the likelihood of misplaced and damaged inventory.

For instance, if you group products based on SKU type without considering which products move faster, you may have staff traveling frequently to pick and pack your most popular items, resulting in higher labor costs and increased risk of product damage.

With 51% of companies increasing pay to close warehouse staffing gaps, improving warehousing logistics can effectively offset increased labor costs and generate long-term savings.

An organized warehouse should lead to more efficient sorting and picking. This strategy is especially effective for brands with large warehouses, where workers may have to travel thousands of square feet for a single product.

The key is putting your fast-moving items up front in the staging area. On top of that, using tools like Cin7 Warehouse Management can help you further optimize your pick, pack, and ship process.

Refer to our warehouse layout design best practices to learn more.

4. Get rid of obsolete stock

Obsolete stock refers to any inventory that’s stayed on the shelves after it should’ve been sold. In other words, it’s products you purchased but couldn’t sell.

Holding too much inventory increases the chance that the stock you thought would sell is now taking up valuable space in your warehouse and costing you more money than you paid for it.

The key here is inventory reduction. The less you have, the less your carrying costs will be. And obsolete stock is the most costly inventory you can have. Not to mention, it’s taking up space that could be used to house faster-selling products.

If you already have a lot of obsolete stock, you can try product bundling or price discounts to sell more. You may also be able to donate your obsolete stock you can’t sell for a tax write-off.

Check out our guide on avoiding obsolete stock so it doesn’t become another problem in the future.

5. Implement Just-in-time inventory

Just-in-time inventory (JIT) management is a method for keeping almost no inventory in your warehouse at all, but instead, ordering everything you need the moment you need it.

It’s a form of lean manufacturing that eliminates the need for safety stock and drastically reduces inventory costs.

It requires you to:

  • Separate repetitive orders from one-stop business
  • Develop strong supply chain relationships
  • Institute or improve quality control
  • Shorten production cycles

While managing inventory with the JIT method isn’t for everybody, it’s a proven way to reduce costs dramatically. Use our complete guide to JIT inventory to see if it’s right for you.

6. Use consignment inventory

Consignment inventory allows you to offload a portion of your inventory to the retailer carrying your inventory. The catch to this arrangement is that the retailer doesn’t pay for the inventory upfront. Instead, they pay you when they make a sale.

If you’re OK with that, selling on consignment can be an easy way to reduce your inventory costs. See examples and benefits of consignment inventory here.

7. Reduce lead times

Lead time reduction is the process of shortening the time it takes to receive a purchase order. Shorter lead times reduce inventory costs in two ways.

First, they allow you to reduce inventory levels, helping you avoid costly overstocking. Second, shorter lead times mean you can place less frequent orders, which makes it possible to reduce the size and cost of your warehouse.

If this strategy is right for you, learn more about how to calculate and reduce lead time.

8. Monitor KPIs

Tracking your inventory KPIs is essential to reducing costs in all aspects of your business, not just inventory costs. In addition to your total cost of inventory, you should also be tracking your write-offs and write-downs, rate of inventory turnover, cycle time, and fill rate.

By benchmarking your numbers against industry averages, you can assess how well you manage your business and warehouse and identify opportunities to cut costs.

9. Use a perpetual inventory system

The debate between periodic and perpetual inventory is mostly coming to a close as more and more businesses recognize the cost-cutting power of a perpetual inventory system.

Perpetual inventory lets you track your purchases and sales in real time, allowing you to automatically order stock when necessary and maintain healthy inventory levels. While it may sound like more work, you can automate it.

Discover the benefits of inventory management software here and determine which features to look for in a provider.

10. Improve forecast accuracy

Monitoring your business in real-time not only lets you know when you’re low on stock, it also helps you identify your best and worst-selling items and improve demand forecasting.

Accurate forecasts allow you to order just enough to satisfy demand throughout the year for every season.

With tools like Cin7 Core, you can also use sales data to better optimize your inventory levels based on what’s most popular. Follow our inventory planning best practices to get the most out of your forecasting.

Final thoughts: 10 strategies to reduce inventory costs

Investing in a cloud-based inventory management system allows you to take advantage of many of the cost-reduction strategies listed here. With Cin7, you can know your reorder point, streamline your stocktake, lower your lead time, and deliver accurate metrics for tracking KPIs and forecasting demand.

To see how you can use real-time inventory data and automation to build efficiency, cut costs, and free up capital, try Cin7 Core today.





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