6 Ways to Reduce Small Business Inventory Cost

As a business owner running a retail, service, contracting or manufacturing business, you may not realize the true cost of carrying excess inventory. Reducing business inventory costs in a competitive market can help put you one step ahead of the competition.

Let’s be real here – storing stuff is very expensive! The cost can be as high as 29% of the inventory’s value if you include all the carrying costs, damaged inventory, and storage. This means for every $500,000 in products,you could be paying up to $100,000 to $150,000 to store them in a warehouse and move them in and out of your store.

That’s why managing your inventory is extremely important for your business – it can mean the difference between your business flourishing or barely surviving. Based on how much inventory you have, cutting costs even by 5% could save you thousands of dollars. You can then put that amount towards growing your business.

There are many ways to reduce your business’s inventory costs. Let’s take a closer look at them.

But first, what is the cost of inventory?

The cost of inventory is essentially the cost of holding and storing inventory over a certain period of time, or until you’re able to sell it. When you calculate this properly, you can add it to other expenses associated with sales, such as cost of inventory, to develop an accurate understanding of what your business profits. Additionally, it can also help you determine how much more inventory you require to satisfy the demand for your products.

Inventory costs can include:

  • Ordering costs
  • Holding costs:
    • Cost of space
    • Cost of money
    • Cost of obsolescence
  • Administrative costs

You can use this simple formula to calculate the cost of inventory for your business.

If you the calculated cost of your inventory seems too high, you might want to consider using the following ways to reduce those costs.

How to reduce the cost of inventory?

Managing inventory is tricky. You need to find a balance, since the cost of inventory can quickly add up without you even realizing it. This can lead to little to no profit and inflated expenses. By applying a few of the strategies mentioned below, you can reclaim your cash flow and grow your business.

Organize your warehouse

If you find yourself with excess inventory more often than not, it’s probably best to set up a warehouse or designated storage area to store your extra stuff. Warehouses serve as an easy way to keep your business’s inventory organized, so you can focus your time and effort towards what you do best – running your business. An organized warehouse helps you pick up orders, store unsold items, and pull or ship the items you need to be sold quicker. You should come up with an effective floor plan, which will allow you to see and decide where to place your items that are the highest demand. Before placing any items in the warehouse, label all your shelves and consider using Warehouse label solutions to customize your labels effectively.

Understand & Manage inventory level

Your inventory level is the available quantity of an item at a specific location. For every location where an inventory item is available, there is a level that represents that item’s quantity. Even though keeping a high inventory allows you to meet customer demand, it might cost your business tons of money. So it’s best to keep track of your inventory levels by avoiding overstocking, in order to reduce cost.

The good news is, there are several different inventory management software options available to help you keep track of your inventory at any given point in time. Software such as Get Sweet, Voodoo Robotics & Clear Spider is great options that can help you keep your inventory information up-to-date, which in turn will allow you to make decisions on how much inventory to have on hand – ultimately lowering your inventory costs.

Assess your SKUs

SKU is short for Stock Keeping Units, which are identification codes for items. In basic terms, they help you track all your different kinds of inventory. Items that are straightforward have one SKU, but if your business sells items like clothing in various colours and sizes, they can have multiple SKUs.

Items that have multiple SKUs can be difficult to deal with in your inventory. You may notice that some people are attempting to order a certain type of product from your business, like a t-shirt, but are unable to do so because the size they want is never in stock. For this reason, it’s good to use management software, like Wasp Barcode, that can manage all of your SKU data, so you can have a better understanding of which items are doing well in the market and ensure that you’re never out of a product that your customers want.

Invest in automatic inventory reorder

When you run low on merchandise, it’s best to get replacements as soon as possible. Implementing a tracking system allows you to automatically reorder merchandise when necessary. The way the system works is that it monitors your daily inventory and compares it to your sales, then calculates what you will need to reorder, when to do it and in what quantity.

Manage delivery & reduce supplier lead time

If the supplier you work with takes forever to fill an order, you might want to consider getting a new supplier. It allows you to reduce stock inventory (less obsolete stock), and to order less stock more frequently (reduce the size and cost of your warehouse).

So shop around for your supplier(s) and find one that meets your business needs.

Reduce your inventory items

Long ago —in times of the old-fashioned hardware store where they had anything and everything you could ever imagine in stock — keeping thousands of stock units or SKUs on hand was considered to be an advantage. But in today’s world, overstocking is actually a disadvantage and can lead to lower profits. You should decide which items are bestsellers and keep enough of them in stock to meet customer demand.

If you find your warehouse with excess inventory, here are some ways to reduce it:

  • Return it to your suppliers – you may either get a refund, a discount or credit on your next purchase, depending on your relationship with your suppliers
  • Exchange with your competitors – find a competitor that could use your stock and see if you can do a fair exchange

Ultimately, inventory is a big part of your small business and keeping inventory costs low is a challenge. You first need to have an understanding of what kind of inventory you have on hand and how fast it is moving, in order to reduce its costs. Besides that, you also should consider investing in inventory management software that can help you analyze all your expenses. You can then use the data provided to estimate stock quantities.

If you keep these tips in mind and apply them to your business, you will have an easier time managing and growing it!