A rise in demand for your products is a strong indicator of your business’s success and growth. However, maintaining an adequate inventory is essential to meet current demand and also be prepared for any future increases in demand. Storing and managing growing inventory comes with a significant holding cost that increases your business expenses. Excess inventory not only increases holding costs but also reduces profitability, blocks cash flow, and decreases flexibility. This makes it crucial to follow effective strategies to reduce inventory holding costs and increase business profitability.
Inventory holding costs are the charges businesses incur when storing and maintaining their inventory. Rent, maintenance, employee salaries, utilities, interest rates, spoilage, depreciation, theft, obsolescence, and other expenses are all considered holding costs. In this blog, we are going to share some effective techniques for reducing inventory holding costs. From consigning excess stock to decreasing lead time, these strategies help you decrease your expenses.
Consigning Excess Stock
Excess stock is the surplus inventory that exceeds the current market demand due to reasons such as overstocking, shift in market trends, overestimation, or seasonal changes. Such excess stock takes up a lot of space in the warehouse as well as block cashflow and capital. Consigning surplus stock is the best way to relieve this burden and turn it into a revenue-generating opportunity.
Consignment services involves connecting with a consignee (retailer or wholesaler) to sell your excess stock. In this, the consignee takes the responsibility of selling your excess stock in the market at a reasonable price in return for a commission. The ownership of goods stays with you, and the consignee just acts as an agent to sell goods.
This effective technique helps you cut holding costs as the consignee transports the excess goods to their warehouse, freeing up your warehouse space. This reduces rent, storage costs, insurance costs, handling costs, and opportunity costs.
Get the Right Reorder Point
The reorder point is a point that indicates the level of inventory after which you have to order new inventory to fulfill the market demand. It is important to determine the appropriate reorder point to avoid both running out of stock and overstocking.
To do that, first calculate the rate at which your inventory is sold, then determine the time it takes to get new inventory. This helps you calculate the right reorder point using the formula: Average Daily Usage × Lead Time. The resulting units, for example, 40 units, will be your reorder point.
Now, when you reorder stock at the right time, you don’t have to spend money on storing excess inventory. This reduces holding costs related to rent, storage, dead stock, obsolescence, and urgent stock ordering.
Correct Demand Forecasting
Excess inventory is the biggest reason behind high holding costs, and incorrect market demand is the primary cause of excess inventory. Correct demand forecasting is critical for understanding market demand and adjusting inventory levels accordingly. This allows you to keep the right volume of inventory to fulfill client demand while avoiding excess stock.
Avoiding overstocking leads to reduced storage costs, obsolescence, rent, and insurance costs, which ultimately reduce holding costs.
The simplest way to ensure right demand forecasting is using data analysis, historical data, market trends, collaboration with customers and suppliers, and utilizing forecasting software. Use inventory management software to perform effective forecasting via real time data and streamline purchases and operations. Correct demand forecasting significantly reduces holding costs by aligning inventory levels with the actual demand and sales patterns.
Eliminate Dead Stock
Deadstock is defined as unsold items that neither have current market demand nor are expected to sell in the future. They occupy valuable warehouse space, raising storage, rent, insurance, obsolescence, maintenance, theft, and other costs. It’s crucial to eliminate dead stock to free up the warehouse space, reduce holding costs, and increase capital. This proactive approach gives you an opportunity to invest in and store trending goods, which increases sales.
The best ways to eliminate dead stock include bundling, returning to the supplier, making donations, selling, and liquidating. To help dead stock move out of your space, bundle it with high-demand products for free or at a discount. You can also return it to the supplier if they accept it, donate it to a social organization, offer it for sale or a discount, or sell it to liquidators.
Implement Just-in-Time (JIT) Inventory System
The just-in-time inventory system is an effective technique to cut back on extra inventory and reduce holding costs. This strategy allows you to maintain an inventory level that precisely meets the present demand rather than storing any excess inventory.
In this, you order and receive goods only when they are needed in the production process or when customers demand them. This minimizes inventory levels and avoids costs related to theft, rent, obsolescence, insurance, maintenance, damage, etc.
The simplest way to use this method is to understand and analyze market demand and customer behavior using historical data. However, the biggest requirement while using this approach is a strong relationship with the supplier and logistics company. This helps to ensure that the inventory is received as soon as possible after you place your order.
Avoid Minimum Order Quantities
To increase sales, manufacturers provide minimum order quantity benefits. In that, they provide wholesalers with economies of scale by offering lower prices per unit for large orders. While this may seem like a good deal, ordering more than the market demand can lead to overstocking. Overstocking raises storage, rent, obsolescence, insurance, utility, and maintenance costs, increasing holding costs.
Therefore, it’s best to avoid the benefits of minimum order quantities and order the right quantity as per market demand. To do that, negotiate with manufacturers and suppliers and accept a slightly higher price than MOQ but receive small quantities only. Besides that, you can team up with other small businesses or buyers who need the same products in bulk. This way, you can enjoy the benefits of such lucrative offers as well as reduce holding costs.
Decrease Supplier Lead Time
Another effective and valuable technique for reducing holding costs is decreasing supplier lead time. Lead time is the time it takes between ordering something from a supplier to receiving it and being able to use or sell it. Reduced lead time helps you to maximize ordering flexibility while avoiding the need to stock surplus goods. You can order goods when they are required, thus reducing carrying, labor, insurance, and storage costs.
To do that, establish a strong relationship with your suppliers and be on better terms with them. Ask for small order quantities, consignment arrangements, frequent deliveries, etc., to reduce the size of your warehouse and the amount of labor required to manage stock.
This strategy frees up tied capital and holding expenses, which allows you to spend aggressively on marketing and promotion to grow your business.
Conclusion
Inventory holding costs are an important business expense that increases with time if you do not implement effective measures to reduce them. We’ve discussed some great techniques to cut holding costs while making sure you don’t end up with too little or too much inventory. From consigning excess stock to decreasing supplier time, these strategies ensure that you can easily reduce holding costs while meeting current demand. Make sure to use inventory management software to track and manage inventory efficiently and effectively.
