6 Ways to Reduce Inventory Holding Costs

continuous improvement

Ever been to the grocery store on an empty stomach? Your meticulous meal plans thrown out the window as your eyes grow wider than your pantry? Two weeks later you’re standing in front of your fridge tossing your uneaten kale and moldy provolone in the trash and swearing you’ll never do it again. Then there you are, back at it again next week, holding a bundle of leeks destined to turn into mulch in the chill drawer.

The central problem here, as it is with businesses big and small, is inventory management. Sure, for most small businesses, goods won’t go bad as fast as your average avocado. But carrying too many goods – more than your customers will reasonably consume – comes with many costs that can be a drag on profitability and cash, reducing the nimbleness required to adequately supply to changing customer demand, as warehouses become clogged with depreciating goods. 

The opposite problem, too few goods, also comes with costs, albeit ones that can be harder to measure. A lack of product can cost companies untold sales, and in the long run create harder to measure costs, like a lack of customer loyalty. The key, as at the grocery, is to be like Goldilocks: project demand so that your inventory isn’t too large, or too small, but just right. 

6 Ways to Reduce Holding Costs

Now, with a little help from our favorite songwriters, below are five of the best ways to manage inventory in order to reduce those pesky inventory holding costs.

1. Project Demand/find patterns

Crystal ball, there’s so many things I need to know

The first and best way to reduce inventory costs is to avoid inventory issues altogether. One of the best ways to reduce the likelihood of these issues is to use past data and market trends to project both demand and, perhaps even importantly, the timing of that demand. The use of predictive metrics allows a small business to understand key trends and buying patterns which can be applied to current inventory.

2. Reduce Lead Time

Do it faster, makes us stronger

Lead time refers to the amount of time it takes for the supplier to get the product to you once you click the order button. The less time it takes, the easier it is to keep inventory low while still being able to meet customer demand. Good, sustained relationships with suppliers can produce numerous benefits, including the reduced lead time for the suppliers to get the products in your warehouses or on your shelves. Though some suppliers may be resistant to the idea of reducing lead time, they may become more amenable if the reduced lead time is paired with more frequent orders, keeping them at work while also reducing your own inventory costs. There are many other strategies for reducing lead time, but at the center of them all is a good working relationship.

3. Find ways to eliminate obsolete goods

Know when to hold’em, know when to fold’em

It can be hard to know when to say goodbye, but keeping a small business nimble means acknowledging when costs are sunk and stock is dead. There are many ways to purge your warehouses of such products: bundling, returning, or donating are all potential solutions, each with benefits and drawbacks worth examining on a company-specific level. But the best solution is not to leave them to clutter the warehouse and/or eliminate valuable shelf-space.

4. Avoid Overstocking

Too Much of a Good Thing

Overstocking occurs when projected supply exceeds realized demand, One of the more common causes of overstocking has to do with minimum order requirements from suppliers. Here too the grocery problem can emerge: Suppliers can tend to offer discounts for larger orders. Managers get big eyes at the increased profit margins; without restraint those margins get wiped away as the larger orders sit on shelves for longer periods. 

5. Timing is everything

Reorder at the right time

Knowing when to click that reorder button can be challenging. Too soon, and stock can get too large, reducing space for more in demand, higher margin products. Too late, and you can potentially lose out on customers and sales. Worse yet, your business might be viewed negatively, leading to losses of more than just the one sale. That’s why safety stock is so important: 

So how do you time it right? There are several options. Understanding past trends is one. Automatic reorders when stock dips below a certain level is another, one that preserves enough stock to match demand with lead time, reducing the likelihood of a potential customer coming up empty handed. Though these can be hard to pull off, and seem to require hands on management, there’s an alternative solution that might be right up your alley…

6. Inventory Management Software

Domo Arigato, Mr. Roboto

A good inventory management solution is a godsend for small businesses. Whether improving inventory counts and order management, allowing for greater insights into the business, or saving money, an effective inventory management system has proven benefits for small businesses.

If You’ve Reduced Holding Costs, Make More Improvements with Zoey

Zoey’s Ecommerce software has demonstrated cost saving benefits for small businesses. Zoey can reduce admin time by up to 80% and cut order processing times in half. Paired with strong inventory management practices, you can be quickly on your way to a more profitable business. Contact us to learn how Zoey can help be part of the solution:

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Patrick Gallagher is a financial writer with nearly a decade of experience in communications with business owners and other high-net worth individuals. He was a writer for the New York Times and worked for several nonprofits. He holds an M.B.A. from the University of Minnesota. He lives in Atlanta with his family and two very rambunctious dogs. 

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