This way, you know what quantities you need in your warehouse to fulfill all your orders in time to meet your clients’ expectations. The analyst said that CarMax painted a bleak near-term industry picture, highlighting that many competitors were sharply cutting prices to reduce bloated high-cost inventories in a falling price environment. Time savings and a real-time view of all raw material inflows by switching from manually recording every inventory purchase to automating them.

reduce inventory cost

Keep a tight control over this class of inventory and allow a little more wiggle room for the smaller classes. Have you ever found yourself returning to stores that change their window displays more than stores that don’t? This means people are more likely to keep coming back to see what’s new, while also feeling a sense of urgency to purchase before a product is gone. With inventory management, you can stay ahead of the curve in product lifecycles and always have fresh inventory cycling through. Negotiate reduced minimum order quantities with suppliers in order to deter long-term risks of holding too much inventory and racking up debt. As a result, smaller and more frequent orders enable your company to have flexibility when variations in demand occur.

Optimizing inventory is more difficult since COVID-19 disrupted the “last-minute” supply chain. Companies can no longer operate with the “just-in-time” method to order goods and reduce inventory cost. This puts a crunch on cash flow and CFOs are faced with a rising need to have their finger on the pulse of their inventory data.

When inventory counts and costs are off, manufacturers double-down their efforts to do more physical inventory counts every quarter or even every month. Doing periodic physical counts gets expensive quickly and ties up valuable time that could be better spent getting orders out to customers. But when a manufacturer is locked into manual inventory management and costing, inaccurate inventory counts almost always lead to customers getting incomplete orders and defective products.

How to calculate inventory costs

It is also very important for the inventory management officers to reduce the safety stock because many companies mostly store extra inventory in the warehouse and it can be wasted. So, the market and demand analysis is very important which can help to reduce inventory. Your company might try one method of lowering inventory costs, or it might try several, as there’s no one-size-fits-all solution. Try one method first and gauge the results, then try something else to reduce your costs further or if you aren’t happy with the results of the first option. Using inventory management softwarecan help you with inventory cost control without requiring a lot of time and effort from you or your employees.

Avoid any potential risks and issues by keeping your inventory for the shortest amount of time as possible. The following five inventory cost reduction strategies can help improve your profitability. Track Inventory Movements to Automatically Re-OrderHow quickly can you get replacement merchandise when you run low?

Minimize Inventory On Hand

That way there is little to no wastage in time and labour after materials and components have been delivered. Here D is demand in units per year, S is order cost per purchase order, and H is the holding cost per unit of the product per year. Splitting stock into these three categories makes it easier to identify issues and concerns around consumption, usage and quantity held in storage. It can also be used to configure warehousing to ensure the most effective storage of the three types of goods. For example, fast-moving items should be held in the most easily accessible part of the warehouse while the non-moving stock may be shifted out altogether. Placing smaller orders and ordering as needed can help buffer your costs if poor forecasting predicted a higher demand for your stock than occurred.

At the time, Wasp recognized most tracking solutions were designed – and priced – for enterprise-level companies, forcing most SMBs to track business-critical items manually. As Wasp’s solutions evolved, the company expanded its client base to include even the largest enterprise-level clients, while maintaining a stronghold in the broad SMB market. If you have a lot of excess space in your warehouse, you are wasting money on unnecessary inventory carrying costs.

  • Stock keeping units are identification codes for products that help you track them through inventory.
  • No one likes to pay for shipping, which explains the demand for free shipping when people shop online.
  • In addition, they provide real-time production and process monitoring data on raw materials consumption, conversion, waste, and shipments in real-time.
  • Check out one of our many preferred partners to find a distributor, reseller, service provider, or integrator suitable for your needs.
  • Depending on your specific needs, AS/RS can also optimize your inventory via FIFO , LIFO , lot numbers, expiration dates, order cut off times, packaging requirements, and more.
  • Without a strategy in place, your company could see themselves with a surplus or shortage of inventory.

As items begin to reach the end of their product life cycle you can put stock reduction strategies in place to manage slow-moving items. Inventory optimization software, such as EazyStock, enables inventory management teams to plan and manage inventory with one centralized view. Forecasting and reordering calculations can be based on point of sale demand data, not demand at each stage of the supply chain. And, with a view of stock levels across all echelons, inventory can be balanced out, so excess stock at one location can be redistributed to other sites, where levels of the same item are lower. Learn more about how Wasp’s Software and Inventory Management systems can help your business dramatically increase your profitability by automating your inventory management.

Reduce Useless Inventory

Adjust your demand forecasting based on expected future sales so you’re ordering the right quantities of merchandise. This is a fairly simple way to reduce costs in inventory management, but most managers get so caught up in the day-to-day demands that they never get around to it. You have two main options if you want to boost your company’s bottom line. If you want to reduce costs, one place to look is at your inventory. The products your company sells allow it to earn revenue, but the cost of storing those products and shipping them from one place to another can eat into the profit. Knowing what sells and when it sells can help you get your inventory costs under control, as can keeping tabs on every product and only ordering new products when necessary.

Another effective way to reduce the carry cost of inventory is to increase the percentage of goods sold. There are many types of inventory costs, and as we mentioned earlier, each type has its own importance in arriving at the effective cost incurred by the company for holding inventory. Inventory costs are one of the most important costs incurred by any company or organization, which means the value of the inventory. There are many types of inventory costs, and each type has its own importance in arriving at the actual cost of inventory held by the company. Hopefully you’re scrambling to rethink your inventory management situation if any of these scenarios sparked concern. After all, smart inventory management is all about running an efficient and automated business with less inventory to better plan for the future.

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Inventory carrying costs are an important statistic that can help businesses to track their inventory more efficiently and reduce the amount of time and money spent on Inventory management. Moreover, This software can automate many of the tasks involved in Inventory management, making it easier and faster to manage Inventory. In order to reduce inventory carrying costs, you need to make sure that your Inventory is turning over as quickly as possible. This can be done by increasing sales, renegotiating with suppliers/customers, or streamlining your ordering process. If you can get your suppliers to reduce their prices or your customers to increase their order sizes, you can reduce your inventory carrying costs.

The Best 3 Ways to Reduce Inventory Costs

Manufacturers don’t need to be locked into doing manual inventory counts forever. You may not be able to pay for the volume of products listed in the MOQ. Carrying costs help you compare cost reduction strategies your profits with those incurred due to the inventory you hold. So, always keep in mind that your average carry cost of inventory should be within 15–30% of your total inventory value.

reduce inventory cost

Using this process for even some of your products saves on labour costs, fulfilment demands, warehousing space and administrative work. Industrial vending machines track data from your inventory management system so you can gain valuable insight into your internal supply requirements. You’ll save on labor costs since supply management will be automated while this organized solution saves you floor space and improves overall inventory management.


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. To combat excess inventory, many manufacturers are consolidating their supplier base and using fewer vendors to do business with. However, this more focused approach gives room for a closer relationship with the vendors they do choose to do business with. The manufacturer and supplier base build a relationship to improve products to reduce material costs. Customer service facets like improved delivery time is also a benefit.

If you can’t automatically remove duplicates, you’ll need to go through and clean up your database every so often. Sit within a central repository shared by as many functions of the business as possible. This is to eliminate the silo effect, where different systems hoard their data and others can’t use it. You need to use accurate inventory forecast models which apply seasonality and trends to ensure any fluctuations in demand are accounted for when reordering stock. From jet airliner orders to chemical production news, publications from IndustryWeek’s parent company offer a broad take on recent news.

Data allows you to make evidence-based strategic decisions, dispensing with the old ‘gut feel’ approach. You can combine data points to filter data by different categories, for example viewing sales by product, demographic, location, and other criteria. Or you can collect data to analyse your inventory using important metrics .

Three Ways to Reduce Inventory Cost

Often, a small price concession on the part of the supplier or customer can result in significant savings for the business. Diggipacks’ solutions provide you with the best inventory management software that will help you avoid a large part of inventory carrying costs. The phrase ‘better safe, than sorry’ aptly applies to reducing inventory in supply chain management. Because inventory costs are high, if companies can catch and reduce inventory costs at various stages along the supply chain, the end result is rid of uncertainty. The first and foremost important method to reduce inventory is to determine the demand for the products in the market.

Increase your inventory turnover rate

Inventory levels don’t update in real-time and are instead refreshed at the end of each day, or worse, manually. Products can’t be tracked across multiple locations, like stores, warehouses and 3PL facilities. Better than that, you can try to take advantage of possible association discounts. Check if there’s an arrangement in your industry that can obtain smaller prices for your business and see how can you drag benefits from it.

Everything Retailers Need to Know About Inventory Costs

For many businesses, discounts are a common tool to attract business, clear out slow moving inventory and reward loyal customers. Article by Alecia Bland in collaboration with our team of inventory management and business specialists. When she’s not reading a book with her cat for company, you can usually find her cooking, eating or trying to make her garden productive. KPIs can consider factors like turnover, costs, relationships with suppliers, and other metrics. By setting realistic targets and tracking how the business performs, you can see what may need improvement. In this scenario increases in demand are passed down the supply chain, and the biggest impact is felt by those at the farthest end – suppliers of raw materials.