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10 ways to reduce inventory waste and improve profits

Written by
Sep 28, 2023
11:38 am
minute read

The truth is, when it comes to lean inventory management, there are no secret techniques. Tested inventory management and control tactics — like just-in-time, ABC and vendor-managed inventory — remain industry best practices for managing and controlling your inventory. 

Yet, many companies continue to experience high levels of waste and a mismatch of supply and demand, leading to missed opportunities, downtime and increased costs. And then add on volatile market dynamics, persistent supply chain disruptions and competitive pressures. It's a lot to handle. 

Balancing these factors calls for a more nuanced approach to inventory management, allowing for strategic safety stocks to mitigate known risks in some situations and dialing back on unnecessarily excessive inventory in others.

Implementing inventory strategies at scale can minimize waste and optimize human and financial resources but requires flexible, pragmatic solutions that address a business's complexities and unique traits.

To put it plainly, shit happens, and in today's market, your systems and processes need to be as flexible as a master yogi to keep up with it all. Let's examine how supply chain technology can help you reduce inventory and flex operational prowess.

The high costs of wasted inventory

We all understand that the cost of poor inventory management extends far beyond the cost of the inventory itself. However, leaders sometimes need to realize just how much-escalated inventory costs may be damaging profits, long-term company objectives and growth plans.

To put it into perspective, Inventory is one of the most significant expenses for many companies — often 20 - 40%, according to ISM World. Your cash is sometimes tied up in your inventory stock, requiring resources to hold and manage and introducing financial risk. 

Let's look at the different ways carrying inventory could cost you.

Carrying costs

Inventory carrying costs — the total amount a company spends to stock and store items before they're used or sold — can significantly affect profitability. Carrying costs alone equate, on average, to about 20% to 30% of total inventory value.

Holding costs (another name for carrying costs) include obvious, more tangible things like storage, transportation and handling, taxes and insurance, and the less obvious yet significant costs associated with impeded cash flow and increased risks.

Impeded cash flow

Poor cash flow can have significant long-term, financial and reputational implications. Late payments, missed early payment discounts, late payment penalties, and, critically, lost opportunity costs can severely hamper a company's ability to gain a competitive advantage.

Essentially, lost opportunity costs forego more advantageous opportunities due to too much capital tied up in inventory. If a company has poor cash flow, it could mean missing out on investment or growth opportunities, impairing market acquisition and other long-term growth plans.

Financial risks

Don't let dead inventory waste away in your warehouse. The longer inventory sits on a rack, the more likely it is to incur damage, get lost, expire or turn obsolete before it is used or sold.

Pay close attention to perishable or seasonal inventory, too. These items run a higher risk of going bad, exposing you to potential financial write-offs or forcing price markdowns if inventory sits for too long.

Why manufacturers struggle with inventory waste

Have you heard a say that a company's problems are evidenced in its inventory? It's not wrong. 

Supply chain leaders are often frustrated because of overly cumbersome processes, information silos, and limited software. They can reduce inventory, control costs and improve service levels as they respond to constant disruption and unpredictable consumer demand.

Many often resort to "just-in-case" (JIC) inventory tactics, increasing safety stocks and holding large amounts of inventory to buffer the impacts and lessen the probability of stockouts. But only some can withstand the associated high costs and burgeoning risk.

You can find more cost-friendly solutions to remain competitive and continue to deliver stake and shareholder value. To do that, look at some root causes that lead to overstock and financial waste, including:

  • Unexpected changes to supply or demand
  • Missing, lost or damaged inventory
  • Expired or aged stock 
  • Inaccurate or infrequent inventory counts
  • Incomplete or inaccurate data stemming from business complexities
  • Manual (often spreadsheet-based) processes that are prone to human error
  • Material quality issues making their way into production or the warehouse floor

Strategies to reduce wasted inventory

It's not all doom and gloom. You can reduce wasted inventory with the right technology for ultimate flexibility and maximum capability. You can optimize your inventory and warehouse management processes when you ditch inflexible technology and strategies that were once hard to implement and govern.  

When reducing inventory waste, having accurate, reliable information is critical. Your supply chain is complex. You might have stock keepers forgetting to transfer inventory from one location to another, receivers bypassing quality checks due to time constraints, incomplete or inaccurate cycle counts, product quality issues failing to be systematically segregated, and inadequate tracing and recall procedures. These issues can negatively impact your inventory accuracy and lead to soaring waste costs.

By leveraging supply chain technology and implementing these 10 advanced inventory management techniques, you can get to the root of these issues and curtail inventory waste:

Track your inventory accurately and in real-time.

By tracking, controlling and allocating inventory in real-time (and knowing precisely what is in your warehouse and where at any given time), you can eliminate redundant purchases and halt the over-purchasing of inventory, buying no more than you need when needed.

Systematically track damaged, spoiled or aging inventory.

Eliminate inventory that gets lost in the back of your warehouse, spoils or goes obsolete, whether it's because someone forgot where they put it or there was a sudden change in demand.

Make complex work simple with customizable inventory tracking.

Inventory tracking processes tailored to the specific product attributes that do the hard math for you, allowing you to maximize the usage of inventory and allocate by any unit of measure (cases, pallets, length, weight, etc.)

Monitor and mitigate against aging inventory.

Automatically send relevant reports or alerts through Slack, email or text as your inventory ages so you can remain proactive and adjust your production or promotion schedules to use or sell inventory before it goes bad or becomes obsolete.

More accurately plan demand, purchasing and production schedules.

Custom forecasts enable you to plan better what product to purchase or make. An accurate view of supply and demand allows you to spot trends early on and make data-driven decisions so you can avoid having too much or too little.

Automate cycle counts.

You can further minimize spoiled or expired inventory by automatically generating systemic cycle count jobs based on product, vendor or inventory attributes to ensure accurate inventory numbers by counting the most critical inventory on any given frequency.

Pinpoint recalls.

Automate and pinpoint recalls by lot code, batch or serial number with lot-tracked license plate numbers so you can segregate and scrap only what is absolutely necessary.

Eliminate human error with the use of barcodes.

Reduce the time it takes to manage inventory using barcodes and eliminate time-consuming, error-prone manual data entry that can turn into costly errors.

Enhance and enforce your receiving and QA processes.

You're only as strong as your supply chain partners. Extensive quality assurance checks and systematic receiving processes ensure that only good inventory enters your warehouse. Automated vendor infraction tracking can help you more easily charge back vendors for quality or delivery issues, holding your suppliers accountable to deter future problems.

Enforce and enable inventory strategies, such as first-in-first-out (FIFO) and last-in-first-out (LIFO).

Avoid aged stock by Systematically enforcing inventory methods — such as first-expired-first-out (FEFO), FIFO or LIFO — ensuring the right inventory gets picked in the desired order.

It couldn't be clearer that inventory waste impacts a company's bottom line in a significant way, tying up capital and presenting a myriad of financial risks. By implementing tried-and-true inventory management techniques coupled with cutting-edge supply chain technology, companies can get real-time visibility, accuracy and control over their inventory — and at the right level of detail. 

The result? Reduced waste, increased efficiency and enhanced growth potential and profitability. 

Ready to reduce inventory, minimize waste and boost profits?

With the right supply chain technology partner, you can embrace more dynamic working methods, improve your operational prowess, and learn to do more with less.

That is where PorterLogic comes in. With the right strategies and tools, we can make the journey from excessive inventory waste to optimized operations a tangible reality. PorterLogic helps teams reduce inventory and maximize productivity across their supply chain — from warehousing and inventory management to procurement, returns and more.

Ready to learn more about bolstering profits, increasing responsiveness and running a profitable organization? Subscribe to PorterLogic's newsletter to stay up-to-date on innovative supply chain practices.

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