An increase in demand is a great sign for any small business, but it comes with higher overheads.
A significant amount of cost is usually tied up in your growing inventory. So reducing overall inventory costs is a great way to free up and reallocate capital.
Managing inventory is costly. Paying for warehousing, accounting for breakage, shrinkage, and quality control (as well as other inventory costs) can be expensive – especially when adding more products and new collections to your growing business.
You might be wondering what costs incur when adding more products and new collections.
Purchasing costs. How much are your suppliers charging you? If you are selling internationally, how much do you spend on customs, tariffs, and taxes?
Carrying costs. How much do warehouses cost your business? This includes renting the storage space, paying for staff wages, and utility charges.
Shortage costs. How much does it cost when an item unexpectedly goes out of stock? You may have to pay a premium on shipping and delivery to get your item to the customer on time.
How can I reduce inventory holding costs?
Get the right reorder point
Make minimum order quantities work for you
Get rid of your deadstock
Decrease supplier lead time
Use inventory management software
6 ways to reduce inventory holding costs
SMEs that are experiencing hyper-growth for the first time can be caught off guard by snowballing inventory costs. So we’ve put together six ways to keep costs low while optimizing your inventory performance.
1. Get the right reorder point
Understanding the right time to reorder products and the right volume at which to do so is an easy way to make sure that you are not holding more inventory than you can sell or having too little stock to fulfill demand.
One way to determine your reorder points is to use a demand forecasting tool. Look at the sales data over the past few years, factoring in seasonality, geography, and what channels customers most often purchased on.
A study showed that 46 percent of SMBs say they look into information from the previous months to enjoy insights into sales patterns. Additionally, you can take a look at what businesses with similar sales models and cycles as yours have to say about setting up the right reorder points.
Minimum order quantities (MOQs) allow wholesalers to enjoy the benefits of economies of scale; the more they order, the cheaper the price of each unit. However, this can be challenging for the wholesaler. Larger wholesalers have regulated cash flow and excess capital, so placing orders for a large production run is easy.
For SMEs, cash flow is usually less reliable, leaving them with three options:
Accept the MOQ and risk being stuck with an excess of stock
Don’t make the order and lose potential revenue
Negotiate on the order
Negotiation is the best option for SMEs. You may not be able to pay for the volume of products listed in the MOQ. However, by reaching out to the supplier, you may be able to offer a slightly higher price per unit for a much smaller number of units or find other buyers who need the same products and make a bulk purchase with your combined resources.
3. Avoid overstocking
If you are spending a sizable portion of your budget on replenishing your stock, you could be missing out on new opportunities to grow your business.
Suppliers often drive a hard bargain with larger discounts for higher volume orders, deals on new and promotional items, and even free products on certain orders.
You can’t say no to a good deal right? Wrong.
It may seem as though you are saving money by accepting deals and discounts because you think you will need to reorder products at some point anyway. However, if your products aren’t constantly flying off the shelves, you will be left what’s known as deadstock. That is the price of paying for products that are sitting in storage.
The money spent on storing deadstock could be spent trying out new products or running a new marketing campaign. Run a smarter business by ordering the right amount of stock and using the freed up capital to sell on new channels or diversify your inventory.
4. Get rid of your deadstock
Did you already accept that hot deal from your supplier and are now stuck with stock that just won’t budge and is hovering above your head like a giant cloud? Here are some easy ways to get rid of deadstock and clear the inventory skies.
If you’re looking to get rid of your deadstock, you can:
Bundle it as free gifts when customers purchase popular items
Return it to your supplier if their return policy allows for it. However, some suppliers charge a penalty for returning items or only provide refunds in the form of store credit
Donate it and enjoy tax deductions for contributions to charities
Giving away products for less than the cost price is never a great feeling. However, just like Elsa in Frozen, you have to let it go. Free up your inventory for new and potentially more profitable products while reducing the cost of your warehousing.
5. Decrease supplier lead time
One creative way to reduce inventory holding costs is to reduce supplier lead time. Let’s say you can get a new shipment to your warehouse in seven days instead of 10. You will be able to reduce the amount of stock you hold on hand because of the new lead time.
With more shipments, you can also look at reducing the order quantities per shipment and reduce carrying costs because you no longer need large amounts of storage space.
Assuming you have developed a good relationship with your supplier, highlight the fact that you are going to be making repeat orders for a long time, guaranteeing them recurring revenue. The new model also means more frequent shipments, which may work to their benefit.
6. Use inventory management software
A study presented that 78 percent of SMBs don’t use inventory management software. Of the 22 percent of SMBs that do, they have found that the investment has shown huge ROI in terms of saving time and money. Research shows 16 percent say they’ve saved a day or more, 39 percent saved five hours or more, and 37 percent saved less than five hours – all by automating inventory management.
How does inventory management software work?
It helps companies run smarter with real-time updates on stock movements across all sales channels. You and your team no longer need to dedicate hours each day manually managing stock levels.
It helps companies grow faster by pulling granular reports on sales performance, product sales by channel, location, and more, and decide what is the next best step to generate more revenue.
It helps companies sell more with a vast, fully integrated app ecosystem. Connect your inventory management with multiple sales channels, accounting, shipping, fulfillment apps, and more to sell everywhere your customers are.
If your business has not invested in a cloud-based inventory management software solution, it’s time to consider signing up for the fastest, most cost-effective way to save on inventory holding costs.
Sarah is the Senior Marketing Director at TradeGecko, a powerful inventory and commerce operating system designed to help founders and SMBs by providing them with the tools and resources to sell more, grow faster, and run smarter.