While these practices can help you run your business, they usually trigger unwanted problems, such as the inability to find specific stock items, not knowing what exactly is in stock, and having too many slow-selling products. Unfortunately, these issues directly affect your company's bottom line by increasing costs continuously.
Reasons of High Inventory Costs
You can find the right solutions to specific inventory-related problems only after identifying the reasons why your inventory control methods cost so much. Potential issues include:
- Inaccurate Inventory Cycle: Inaccurate inventory cycle is the result of not having accurate or enough information to forecast the needs and demands of your customers. This simultaneously triggers two contradictory issues: excess inventory, on one side, and inventory shortage, on the other. As expected, these problems lead to increased inventory costs and loss of customers.
- Non-Existent Target: Failing to set an annual target may also increase inventory costs. To set a realistic goal, run year-to-date comparisons of inventory holding costs, cost per unit, and acquisition lead times.
Solution: To lower the costs related to particular inventory control methods, transfer excess stock to locations where specific items are needed; check to see if you can get the same volume of items at a lower cost per unit; and look for solutions to reduce acquisition lead time, regardless of whether it's receiving cycle time, transportation time, or supplier lead time.
- Inefficient Advertising: One of the biggest inventory costs is a link to obsolete inventory items. Usually, companies stop selling certain products due to inefficient marketing and sales strategies.
Solution: If your marketing and sales departments are unable to move slow-selling products, search for companies that specialize in liquidating such stocks. You may also choose to donate the items you cannot sell anymore to non-profit organizations.
- Inefficient Approach to Demands: Since customers are becoming more and more demanding, your management team may feel forced to opt for a wider range of products. This not only implies more items, but also more vendors. In this case, using regular inventory control methods can increase costs significantly.
Solution: To reduce the costs, opt for special vendor stocking and inventory programs that automatically place the time-consuming and costly burden of checking and replenishing inventory items on vendors' shoulders.
- Irrational SKUs: Although reducing the number of SKUs is usually a controversy-ridden process, it can help you handle your inventory better.
Solution: After rationalizing SKUs, use a job order costing system to evaluate the profitability of each item. This way, you can identify the most profitable products.
- Unnecessary Freight Costs: Outgoing and incoming freight costs dictate the level of inventory costs.
Solution: You can reduce freight and inventory costs implicitly by scheduling specific production processes well in advance. This way, you'll not be forced to cover additional freight costs related to rushing the next shipment in or out.
Some other things you can do to get the most out of your inventory control methods include improving space utilization, maintaining accurate inventory balances, increasing your buying power by boosting sales performance, and looking for new manufacturing and sales opportunities that drive economic growth.