Inventory waste can quickly eat away at your profit margins and hinder business growth. Holding onto expired goods, out-of-fashion items, or soon-to-be-outdated tech products can lose your business a serious amount of capital and revenue. Managing customer demand, your production processes, and global supply chains isn't always easy, but implementing strategies can help you establish continuous improvement in your overall inventory management. Solid inventory management means striking a balance between the amount of product in stock and what your customers need in a specific time period. That way, you’ll avoid frustrating stockouts or costly and potentially wasteful overstocks.
Read on to learn about the six different types of waste and how you can improve your management.
What is inventory waste?
Inventory waste is the lost revenue created by unprocessed or unsold inventory. You might think of excess inventory as the lead cause of inventory waste. But it also includes:
- Waste of transporting the inventory
- Storage waste
- Waste of capital tied up in unprocessed inventory
- Wasted payroll expenses on idle employees
- Any other wasted resources associated with producing, processing, and storing finished goods
Why is excess inventory considered waste?
While inventory can generally be considered an asset, as it represents products or materials that can be exchanged for profit, excess inventory is defined as a net drain on profitability.
We can define excess inventory as a surplus of products, materials, or components compared to anticipated or real consumer demand.
Excess inventory is wasteful because it ties up resources (both material and capital) that could be used elsewhere, requires additional storage capacity and holding costs (like insurance and taxes), and creates unnecessary risk of damage, loss, or obsolescence.
The six primary causes of inventory waste
Inventory waste costs your business both time and resources. Without effective management, inventory can absorb your cashflow and show inefficiencies in your business.
It’s essential to reduce inventory waste so that you can optimize your processes and boost your bottom line. Here are six types of waste, along with some solutions for each waste type:
1. Overproduction
Overproduction is the most common cause of inventory waste. This type of waste is typically caused by a desire to be prepared for extra consumer demand. However, overproduction ties up capital, creates excessive holding costs, and in many cases can increase the amount of expired or obsolete goods you will simply have to throw away or sell at a fraction of their original value.
In addition, overproduction ties up raw materials and components that could better be used elsewhere on products your customers want today.
How to reduce overproduction waste:
Manufacture things only as quickly as the customer wants them. Lean manufacturing systems like just-in-time (JIT) allow you to hold onto the amount of stock you need to ensure you meet customer demand without additional inventory costs.
You order what you want for your immediate customer needs and reduce overproduction by producing what you need when you need it.
Before you make any changes to your stocking, you first need to do a full stock count. You need to know exactly what’s in your warehouse, in your storeroom, and on your shelves. This methodology will help you work out what you need to match demand.
You could do this manually, with spreadsheets, or with cloud-based inventory management software. Kanban systems can help you keep track of incoming and outgoing stock so you don’t end up with a surplus.
Using this data, start forecasting what you need during certain periods to help inform your manufacturing and stocking decisions. That way, you’ll maintain the minimum inventory levels required to fulfill customer orders.
2. Waste of waiting
Delays or waiting waste is most commonly caused by inefficiencies in the production process. This type of waste creates drag on production and increases expenses in the form of employee downtime, supply chain bottlenecks, and much-needed warehouse space wasted on partially assembled goods.
Additionally, materials could perish or be damaged as a result of slow and inefficient workflows.
How to reduce waste of waiting:
Avoid delays by automating your stock replenishment systems. If you store your inventory in a warehouse, you could try using software to monitor, track, and notify you of stock levels.
Through optimizing your inventory management processes, it will be easier to efficiently prevent stockouts and better manage production pipelines.
3. Employee motion waste
Motion waste is often caused by inefficient procedures or lack of training that cause an employee to perform tasks without economy of movement, wasting time and costing money in the process.
As a simple example, imagine you own a restaurant and have a server who, instead of carrying food to an entire table using a serving tray, carries each individual plate of food to each individual customer, one by one. Clearly, the time spent walking back and forth from the kitchen to the dining room could be better used elsewhere. This is wasted motion.
How to reduce employee motion waste:
To decrease the amount of employee motion waste, create systematized and consistent workflows to reduce guesswork. This can also help you establish clear, cut-and-dry criteria to judge the performance of your employees.
4. Inventory flaws
Defective goods and materials are a reality for every business.
However, inventory waste in the form of excessive safety stock can cover up inefficiencies in your supply line and may hide the root cause of defects and lost revenue. Examples of unnecessary inventory flaws include low-quality materials, poor manufacturing processes, improper training, and bad design.
The costs of inventory flaws can quickly add up in the form of disappointed customers, processing returns and exchanges, delivery delays, and redesigning products.
How to reduce inventory flaw waste:
You can avoid inventory waste associated with defects by streamlining your inventory production pipeline. Lean manufacturing allows you to identify and correct these issues as quickly as possible.
5. Overprocessing
Overprocessing (not to be confused with overproduction) is any amount of unnecessary complexity involved in the manufacturing or production process. In the automotive world, this is colloquially referred to as “overengineering.”
This type of waste can cause lost revenue in the form of extra parts, time spent in design, and additional labor costs.
While providing additional value to your customers may boost loyalty, going overboard with features or services slows your business model and can cost you money.
Examples include excessive product packaging or aesthetic treatments to components of a product that are not visible to the customer.
How to reduce overprocessing waste:
To reduce overprocessing, analyze every step in your pipeline and ask yourself if this adds value to the customer. If at any point the answer is “no,” then you have spotlighted an example of overprocessing waste.
6. Transportation
Within our interconnected global supply chain, transportation is a must. However, transportation itself adds no value to the products sold and therefore the amount of time your goods spend in transit should be minimized wherever possible.
Transportation waste refers to any unnecessary movement of inventory, such as relocating items within your warehouse or shipping products between locations due to ineffective inventory management. Every time you have to load products or transport them, there’s an increased chance of losing or damaging products.
Transportation waste can also cross over into waiting waste in situations such as loaded trucks or cargo ships sitting idle.
How to reduce transportation waste:
Invest in expedited freight or drop trailer programming to reduce the total amount of time goods spend in transport. For internal transportation, such as moving products within your factory during the production process, assess the layout of your manufacturing floors to reduce motion and maximize efficiency.
Inventory waste accounting best practices
Accounting for inventory waste is essential for determining the actual cost of production for your goods and identifying areas that need to be streamlined.
The specific procedures to account for inventory waste will depend on your business and vary greatly by industry, but there are some general practices that can be employed for continuous improvement.
- Complete a physical stock evaluation (stocktake): Complete a physical review of your stock and compare this to your inventory cards at least once annually. The numbers should be identical, but if they are not, inventory cards should be rectified to represent the physical stocktake.
- Review the flow of production line and storage: Analyze your production chain, from acquiring raw materials to shipment, storage, and fulfillment, to identify areas of waste. This waste can come in the form of unnecessary purchasing, long lead times for transportation, or excessive holding periods prior to fulfillment.
- Use data to work off of real consumer demand: Review purchase data using your accounting software to create accurate forecasts of consumer demand. Hold only enough goods on hand to fulfill the true needs of your customers with a minimal amount of safety stock.
Next steps to reduce inventory waste at your enterprise
Inventory waste causes revenue loss and slows down business growth. To reduce inventory waste, it’s essential to keep your manufacturing processes lean and ensure other processes like transportation and storage are as efficient as possible.
Effective resource management is key for keeping your overhead costs and inventory waste down. As you begin to optimize your processes, your team will get better at problem solving and find that they waste fewer resources and inventory. Ultimately, you’ll increase your revenue and boost your bottom line, helping to grow your business.
With QuickBooks Online, you can easily manage inventory, track consumer demand metrics over time, and identify areas of waste in one simple solution. Access your 30-day free trial of our premier package, QuickBooks Online Advanced, today to get started.
