Let’s face it, doing business today is getting more and more difficult–especially when trying to reduce inventory costs. Depending on the industry you’re in, you face a bunch of challenges:
- Regulatory or government
- Employment issues
- Staff alignment and training
- Health care Costs
And MANY more! All of these issues lead to higher costs in one way or another.
For those of us who produce, inventory, or move products – these costs can be especially difficult to control. Inventory control and associated costs are a tricky business. You have lots of inventory on hand? Let’s try something. Walk out to the area where it sits. Now close your eyes and think of what pallets full of money would look like.
Now, open your eyes slowly. What do you see? OK, you still see your inventory sitting there, but you may as well be staring at pallets full of money because that’s what it is!
Ways to Reduce Inventory Costs
While there are many ways to cut inventory – Here I’ve given you 6 big ways. See if you agree and let us know if you agree or if we can help you stage, move, or deliver your inventory for you.
- Better Planning – See! I told you it was _________ (fill in the blank)’s fault!
Those blanks can be filled in by sales, production, shipping, purchasing, etc.
But we’re a team or at least we should think and act that way. Instead of pointing fingers and trying to lay blame on some person or department for high inventory – work together to plan and take action that most if not all groups agree with. And doesn’t cost anything and working together has other benefits.
- Space Utilization – WIP, Finished Goods, Raw Material, Dead stock, Over-runs, Rework, Defects. Lots of different inventory items and they all take up space. That crowded space could easily make for a traffic jam making it difficult for everyone on the floor to do their jobs effectively. Assuming we scratched step one off of the list, giving yourself more space to make, move, and ship goods is the answer. Using a warehouse for the “good” inventory is an easy alternative; whether you own it or you use a 3PL like CWI Logistics to pick up, stage, inventory, and ship this inventory.
By “good” inventory, I mean finished goods, raw material, and over-runs (maybe). A bad idea is paying to store that inventory internally or externally or how many companies can start a museum with the old or defective material that’s been in storage since, oh, I don’t know – Maybe the dawn of the dark ages?
- Safety Stock – We know that dogs are man’s best friend. And what’s a sales manager’s best friend (well, besides the ORDER!) – Safety stock. Because we know that when a sales manager says he or she is going to sell hundreds of thousands, they really mean they’re going to sell hundreds of hundreds.
(I was a sales manager so I have the right to say that without meaning to offend!).
Let’s say that we DO have the “right” amount of safety stock. In order to make sure it doesn’t magically turn into dead stock, have a great inventory system or hire a company that has one and can help.
- Optimize, systematize, or outsource Inventory Control – (Let’s face it. In many companies, inventory control consists of the guy counting stuff when it comes in, and subtracting it when it goes out. That’s not really inventory control, that’s inventory counting or taking. Sure, there’s value in it. But if you inventory more than 100 pieces of raw inventory, WIP, or finished goods – You need a more sophisticated system for inventory control. The answer could be software, more highly skilled personnel, or outsourcing the task. If you use external warehousing, many of them have their own system which they can use to keep track of your inventory precisely.
- Consignment Inventory – As a Purchasing guy, I REALLY love this one! You buy raw materials from vendors. Vendor delivers. You pay vendor in 30 days.
With consignment inventory, you buy raw materials. Vendor delivers. Vendor owns until you use it. So that pallet full of money we talked about early on. The vendor owns some of it. Combine this with vendor managed inventory, and you have a pretty nice, cost-free (not totally) inventory system. This method also incentivizes the vendor to be involved. If his inventory starts to get heavy, you may decide together to slow down or skip deliveries.
- Buy Even MORE Inventory – I knew you’d love this one! But before you call me crazy (and if you have already, take it back), hear me out. Remember JIT? Just in Time inventory? Where raw material would be delivered to your floor right at the time it was needed? Sure, in theory it makes sense and some have made it work well. But for your supplier, it may be a nightmare. They may have short runs of your material that makes it really expensive for them to make and ship – and you pay for that.
It may make more sense for you to buy in bulk, let them ship to a warehouse, and have the warehouse deliver to your floor as needed. You’ll have to do the math to make sure you would be saving money, but it’s a way of thinking out of the box that could save money and room on your floor.
So that’s 6 ways to reduce inventory costs and as I said, there’s probably 3 times as many ways, but these will hopefully get the gears spinning and get you thinking.