5 Effective Ways to Reduce your Inventory
Inventory is the driving force of your business, generating or hindering cash flow. You need inventory to make money, but you also need to spend money to acquire it. It’s about finding the right balance of inventory to demand. Reducing your inventory overall will lower your costs and increase your cash flow. Consider these 5 effective ways to reduce your inventory.
1. Understand the Cost
Knowing the true cost of your inventory is the first step to controlling it. To start, know your stock. What do you have available? What moves the fastest and the slowest? What provides the highest and lowest profit margins? Once you know, you can work toward increasing your top-selling, highest profit inventory and reducing the rest. When purchasing new stock, determine the most cost effective way to purchase it: in smaller, more frequent orders, thereby limiting the time you hold it, or in larger, less frequent orders, thereby benefiting from a potential price reduction for bulk purchases.
2. Forecast Your Inventory Needs
Forecasting your inventory needs is the key to finding the balance between inventory and demand. First, determine the true factors that drive the demand for your products. Compare past years’ sales with the current year’s sales to determine when and how sales increased or decreased over time. Also, record the details of all promotional periods. Special pricing affects sales. Keep track of the date, duration, price, SKUs, etc., to aid your inventory forecasts. Additionally, recognize the symbiotic relationship you have with your vendors, and share your inventory forecasts. This helps them forecast their own needs which better prepares them to supply your needs. It has its advantages: lowers the supplier’s finished-product inventory, their overall costs, their demand variability, and potentially your price. The farther ahead you can forecast your inventory needs, the greater the chance that you will receive your stock at the best price and in the shortest amount of time.
3. Reduce Lead Time
When you need inventory, how much time elapses between ordering and receiving your stock? Forecasting (and sharing the forecast) allows you to reduce the lead time, especially if some of your products take longer to produce or arrive than others. Additionally, you can reduce internal lead times, the time it takes to enter items into the system and prep them for sale. Consider using barcodes for quick and easy data entry. The less time your employees spend processing inventory, the quicker you can sell it.
4. Liquidate Stagnant Inventory
No one wants to lose money, but if you have stagnant inventory, it is time to cut your losses. If the holding costs are greater on the slow-moving item(s) than the potential profit at the regular price, reduce the price to get rid of it as quickly as possible. Don’t allow stagnant inventory to take up space that would be better filled with money-making items.
5. Location, Location, Location
Not only relevant to real estate, location can affect your inventory levels too. Have more than one location? Centralize your inventory as much as possible into one location, or transfer needed inventory from one to another instead of purchasing new. Don’t want to rent, buy, or build a new storage facility? Maximize storage with narrow aisle handling equipment. The more efficiently and compactly you can store inventory, the less square footage it takes up and the less money it costs to store.
Take a good, long look at your inventory, and determine where your problem areas are. To get your inventory under control, you must understand the basics: what you have and what it costs, what you need and when you’ll need it, what you don’t need and what to do with it, where to put it and how to get it quicker so you can sell it now. Start reducing your inventory, and you’ll lower costs and increase cash flow.
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