7 ways to save on inventory holding cost

When it comes to freeing up capital to grow your business, you can start by looking for areas of improvement and planning to reduce areas of high cost. And since the bulk of your costs will be tied up in inventory, starting with reducing inventory holding costs is the perfect place to start.

Maintaining inventory is expensive. First you have to pay for the items, then you’ve got to keep them safe and looking good. On top of these, you’ve got a whole range of other inventory costs that just keep snowballing. These costs include:

1. Order costs: How much are you spending to procure stock? Do you need to pay for customs, duties, taxes, or inspections?
2. Carrying costs: How much are you spending on storing your inventory? These include renting storage facilities, utilities, and wages.
3. Shortage costs: These are the costs you have to bear when you’re out of stock for an item - they can range from emergency shipping costs to a more intangible loss of customer loyalty.

If you’re wondering how to slam the brakes on these ever increasing inventory holding costs, we’ve got seven cost-cutting tips to keep your inventory lean and healthy!

1. Know your reorder point

If you know your reorder point you’ll know when’s the right time to place orders for new shipments. That means you won’t be spending more on storing excess items, or risk the shortage costs that come with disappointed customers.

There’s lots of ways to decide what’s the best way to determine your reorder point - ranging from forecasting software, to relying on information from previous months, to formulas. 

If you’re looking to figure out the question of “What’s the right quantity to have at any given time?” take a hint from the 46% of SMBs who say they look into information from the previous months to enjoy insights into sales patterns.

2. Beware of minimum order quantities

Minimum order quantities (MOQs) are there to help suppliers and manufacturers enjoy economies of scale - but they can be a source of stress for SMBs. After all, while big retailers can afford to drop the money needed for a massive custom production run, it’s a lot harder for small businesses to do the same, leaving them with three options:

• Accept the offer and get stuck with too much stock
• Give up on their lovely products
• Try to compromise

Obviously, the third option is your best bet. When trying to reach a compromise, you have to get creative in figuring out ways around the MOQ. You can try offering a higher price to compensate for the difference in economies of scale, or finding a group of like-minded SMBs that can pool resources and orders to meet the MOQ. If you can stick to your ideal amount… you’ll save so much on carrying costs!

3. Overstocking - don’t give into temptation

Your suppliers could be really strict about sticking to their MOQ, and you find yourself reluctantly spending money that could be put towards growing your business. Maybe they appealed to your love of a good bargain, plying you with offers of price quantity breaks. After all, purchasing an extra 20% to enjoy a 10% discount sounds like you’re enjoying a great deal… right?

Wrong. You may think you’re saving money by ordering more - after all, if you’re going to have to reorder at some point, you might as well enjoy better prices. But the amount you think you’ve saved by ordering enough for a price quantity break probably won’t even cover the increase in carrying costs.

And every item that sits unused in your storage facility is taking up space that could be used for carrying faster-moving items, or experimenting with a new product line. 

4. Say goodbye to dead stock

Do you remember that product you thought was going to be a hot seller, but it was a total flop? Yes, that one, the cartons sitting at the back of your warehouse. These could also be the fate of products you’ve overstocked because of MOQs… and promptly forgotten about as the season pass.

If you’re looking to get rid of your dead stock, you can:

• Bundle it with complementary popular items and sell the combination at a significant discount.
• Return it to your supplier if their return policy allows for it - but do remember, there’s a high chance they’ll charge you a restocking fee and refund you in store credit.
• Donate it if your country gives you tax deductions for the market value of donations to charities.

Even if you’re feeling like you’re making a loss for letting your products go for next to nothing, remember that Elsa was probably singing about dead stock. Let it go! And once you clear out the dead stock that’s clogging up your business, you’ll have more space to dedicate to more profitable products while reducing your carrying costs.

5. Reduce your supplier lead time

Think of what you could do if only you could get your supplier to reduce their lead time. So instead of taking 10 days for a new shipment to reach you, they’ll be able to do it in seven days. That means you’ll have the opportunity to cut down on the amount of stock that you keep on hand to cover your waiting time. And with a higher frequency of shipments, you can also start looking into ordering smaller quantities more often and reduce the size of your storage facilities.

If you’re wondering how to get your supplier to agree (and not increase shipping costs), we’ve got some suggestions. Assuming you’ve been working with that supplier for a while, having a good working relationship is definitely a step in the right direction. And do remember to highlight that if they can reduce the lead time, you’ll definitely be making more frequent orders.

6. Try switching to a vendor managed inventory

Do you occasionally ask your supplier for an emergency shipment because your stock is selling out too quickly? Or do you sometimes sigh and think it would be nice if you could get your suppliers to manage their products within your store for you?

Well, transiting to a vendor managed inventory (VMI) can make these hopes a reality! It means you’ll leave your suppliers to manage their own products within your inventory. You won’t have to purchase any more suboptimal quantities, since it’s now your supplier’s job to ensure you’re always in stock.

And your suppliers will thank you too! They’ll have a better idea of how to adjust their output to match customer demand - meaning you won’t need to ask favors to expedite shipping or face dreaded out-of-stock situations.

7. Get an inventory management software solution

You totally knew this one was coming, but let’s chat about what an inventory management software solution can do for your business.

Did you know 78% of SMBs don’t use inventory management software yet? But of the 22% that do, they’re really in favor of it, because it gives them huge savings of a precious resource - time. Of the 22% using it, 16% say they’ve saved a day or more, 39% saved 5 hours or more, and 37% saved less than 5 hours, all by automating inventory management.

So how does using inventory management software save time?

• You get to enjoy real-time updates on stock movements across all sales channels - no more spending hours manually updating your inventory every day.
• Say goodbye to spending hours collating monthly/yearly reports on sales and stocks with inventory management software collating these into an easily understandable format.
• Good inventory management software will let you easily integrate with a whole range of add-ons! You’ll be able to integrate your inventory management with multiple sales channels, accounting, shipping, and fulfillment apps… and save time, human resources, and money.

If you’re part of the majority that doesn’t use a cloud-based inventory management software solution, it’s time to consider joining the movement. After all, most of your peers have enjoyed a significant decrease in time spent managing inventory… so why not join them and give it a shot? 

Sources: 1

See also:

Introduction to Carrying Costs

Tips for successful supplier relationship management

The Long Tail of Inventory... and 3 reasons why it's important