All successful large companies must have proper management strategies in place for things like quality, data, finance, human resources, and sales processes, among several other important business functions. Companies that deal with large amounts inventory, however, have the added management problem of achieving efficient and cost-effective inventory management.
Since the warehouse and industrial property identification products we create at Camcode are designed to markedly improve business inventory management, we wanted to learn more about what goes into a cost-saving inventory management strategy. More specifically, we wanted to find some expert tips from industry professionals on what they would consider a great tactic that could meaningfully reduce a business’ inventory costs. To do this, we asked 19 inventory management experts to answer this question:
“What’s the single most effective inventory management strategy or technique companies can use to control and reduce inventory costs?”
We’ve collected and compiled their expert advice into this comprehensive guide on how to create an inventory management strategy that can reduce your inventory costs. See what our experts said below:
Meet Our Panel of Inventory Management Experts:
Gary W. Patterson CPA/MBA, the FiscalDoctor®, is a growth and fiscal leadership expert and the author of “Million Dollar Blind Spots: 20/20 Vision for Financial Growth”, which helps you find your million $ blind spot before it finds you. He has successfully guided hundreds of companies in manufacturing, technology, service, construction and distribution in companies from growth to Inc 500 to Fortune 500.
This is my advice when it comes to effective (and cost-saving) inventory management strategy:
Your million $ blind spot on inventory can very well be WHEN, not if, a problem occurs with one of your key suppliers. Why so, you may ask. Because you will pay for their problem directly or indirectly.
Just as you should have in place the basics of risk management, noted below, how well prepared are each of your key suppliers for WHEN, not if, bad things happen to a good company.
Consider the following relatively inexpensive preventative seven-step proactive plan for dealing with potential risks:
1. Commit to contingency planning.
2. Establish a risk-tolerance framework.
3. Identify potential risks that your company may be up against.
4. Highlight worst-case catastrophic and critical risks.
5. Identify the top five to ten risks that are not included in your financial statements.
6. Develop a coherent action plan that is approved by your executive team.
7. Establish a proactive media policy.
Rick Smith is the Business Development Manager at Afflink, a supply chain logistics and GPO organization that has been a global leader in supply chain management for over 35 years. More than just a group purchasing organization, Afflink uses local distributors on a national scale to provide added efficiencies using the products through strategic consulting solutions.
The single most effective inventory management strategy or technique that companies can use to control and reduce inventory costs is…
Challenge MOQ’s (minimum order quantities) and price quantity breaks.
Supplier minimum order quantities and price quantity breaks can cause surplus inventory. Suppliers require MOQ’s or quantity price breaks to compensate for their costs of setting up a job. The goal is to work with supplier to reduce set-ups. Another option is to propose an annual commitment agreement with the supplier so he can build the entire MOQ, but agrees to hold the inventory and ship it in small quantities.
Have parts delivered more frequently.
The more often a part is delivered the lower the investment in inventory. The chart below displays how increasing the order frequency of your high volume, A and B class items, will reduce your average weeks supply of inventory from 3.7 weeks to 1.9 weeks.
|Class||Frequency Ave.||Inventory||New Frequency||New Ave. Inventory|
|A||Monthly||2 weeks||Weekly||.5 weeks|
|B||Quarterly||6 weeks||Monthly||2 weeks|
|C||6 Months||24 weeks||6 Months||24 weeks|
|Average Inventory||3.7 weeks||1.9 weeks|
For most companies the correct strategy is to increase the order frequency of the high dollar “A” items only.
Deborah Schroeder-Saulnier, D.Mgt. is the Founder and CEO of Excel Leadership Solutions, a global management consulting firm that works collaboratively with business leaders, and a highly sought advisor to senior executives. Leveraging her 25-year career in senior leadership roles, and consulting to business/industry, she partners closely with executives to solve problems, clarify focus, and accelerate the pursuit of critical market, organization, and leadership priorities. She has worked with a number of Fortune 500 companies worldwide, including Boeing, Citigroup, Bunge LTD., Scottrade, Danfoss, IPC-The Hospitalist Company, RGA – Reinsurance Group of America, Scottrade, and World Wide Technology. Deborah’s new book: “The Power of Paradox: Harness the Energy of Competing Ideas to Uncover Radically Innovative Solutions”, brings a counterintuitive approach to solving problems to help you face chronic challenges with confidence and uncover unexpected and infinitely better solutions.
The single most effective inventory management strategy to control and reduce inventory costs is…
A strategy of discipline. Regardless of size, large or small, most companies work to achieve two primary objectives – grow the business by satisfying the customer and manage costs. Businesses seek big data to deliver strategic recommendations based on assessing the customer experience and measuring the cost of inventory. Working under a discipline strategy, companies can effectively mitigate two potential risks – dissatisfying customers by promising a product when there is none and increasing cost by losing tack of outdated stock in the warehouse.
Inventory management techniques that support a strategy of discipline include the following:
- Leading by Example: Discipline must be fostered from the top down, starting with senior management. Leaders must develop effective routines and set clear expectations regarding financial and operational objectives.
- Determining Appropriate Levels: Before launching an inventory process, appropriate levels must be benchmarked on competitive standards, researched for full process integration, and communicated across the organization. These levels should be clearly understood by all and reviewed regularly for maximum efficiency.
- Creating Quality Processes & Systems: Checks and balances must be implemented to streamline inventory management processes. How and when will assessments be conducted? Who completes them? What systems aide the processes? How do you know they are efficient?
- Accelerating Data Knowledge: Leveraging technology is a key differentiator to establish a competitive advantage in the industry. Staying up to date on inventory tracking measures and utilizing data analytics to make business decisions, inventory managers must work with technology to continue driving down the bottom line and manage inventory costs.
Jeff Karrenbauer is President and Co-Founder of INSIGHT, Inc., a leading supply chain planning solutions provider for companies like Exxon/Mobil, Nestle, BASF and many others.
The single most effective inventory management strategy that can help control or reduce inventory costs is to…
Avoid self-inflicted wounds caused by policies and/or performance failures that generate artificial supply and demand variability which, in turn, typically results in unnecessarily high levels of inventory.
Such variability is typically magnified up the supply chain via the well-documented bullwhip effect, UNLESS (and this is still a very big unless) there is truly accurate, timely demand and supply information sharing among the supply chain partners. It is next to impossible for forecasting and inventory control systems, no matter how sophisticated, to react properly to these failures. Example policies include unannounced promotions, end-of-period trade deals, ill-advised pricing and/or order volume incentives, and so on. All of these result in artificial spikes…*and later, troughs*…in demand.
Performance failures include lack of timely notification of channel partners re: status when something goes wrong that negatively impacts supply availability or demand. Examples include natural disasters, catastrophic local events such as an explosion or fire, or premeditated attacks by an intelligent adversary, such as strikes, hostile government policy changes, or terrorist actions. Countering the bullwhip effect requires both accurate, timely information and common sense responses to unpredicted events, especially avoiding the tendency to overreact.
Gary C. Smith is the President of the National Association for the Exchange of Industrial Resources (NAEIR), a Galesburg, Illinois gifts-in-kind organization.
Companies often waste time, drain profitability and divert focus away from core business priorities by mismanaging excess inventory. And in my experience, these are some of the common strategies business inventory managers tend to rely on that are sure to put them into a sweaty panic long into the night:
- Make like an ostrich…put your head in the sand!
- Lease additional space.
- Continue selling it.
- Send it to a landfill.
As if they already have enough keeping them awake at night. Luckily, there’s a way to turn a problem like excess inventory into a positive—for the company’s reputation and bottom line.
IRC Section 170(e)(3), a little-known section of the tax code, allows Regular C Corporations to donate excess inventory and receive an up to twice-cost federal tax deduction. Donating your excess inventory to a gifts-in-kind organization not only will significantly reduce your tax obligation, it will get your excess, non-selling products into the hands of qualified, deserving nonprofits across the country.
Gifts-in-kind organizations solicit donations of valuable, new merchandise from American corporations and redistribute that merchandise to their members, which include schools, churches, government agencies and other nonprofit organizations in need of supplies. The donation process is easy, secure and flexible, and many gifts-in-kind organizations provide a range of free services to donors. They can accept shipments of supplies ranging from one box to dozens of truckloads, and in many cases, the freight charges to ship a donation to a gifts-in-kind program also are tax deductible. They also offer a great solution for companies that are consolidating warehouse locations. Gifts-in-kind organizations keep detailed records of merchandise donations and redistribution, so when tax time rolls around, companies know exactly who received their products and how much they received.
Gifts-in-kind organizations offer a simple, effective solution for excess inventory. Just think how much easier you’ll rest.
David Johnson is the Founding Partner of ACM Partners, a boutique advisory firm advising small and mid-sized businesses. He is an expert in performance improvement, turnaround and restructuring, and has several articles and speaking engagements to his credit.
When it comes to making an effective inventory management strategy that can control and reduce inventory costs, here are my thoughts…
Industrial companies (manufacturers and distributors) too often face the challenge of sub-optimal levels of inventory, leading to poor cash flow characteristics and strained relationships with key stakeholders. A simple way to adjust for the natural tendency of business unit leaders at these companies to hold too much inventory is to shift compensation from a simple P&L focus to a more nuanced compensation plan based on a basket of financial and operational measures that involve not only profitability, but also take into account the cost of capital tied up in excessive inventory.
This measure is useful for all working capital accounts, with the same methodology applying to Accounts Receivable, and the same approach working with Accounts Payable (though in that case, the focus is on ensuring that vendors are being paid neither too quickly nor too slowly).
Joe Crews is the Owner of JIT Solutions Group, LLC, an inventory consulting & management company. His mission since 2006 is to help companies find the “LOST” cash in their warehouse. This is accomplished by developing customized inventory management solutions that make their clients more organized, productive and profitable.
There are several strategies a company can take when attempting to control and reduce inventory costs. At JIT Solutions Group, we highly recommend…
Implementing a 2-Part Cycle Count Program.
By implementing this program, companies will have a more efficient process of counting their inventory as well as a process for auditing items with high usage rate, all without the need for a Year-End Inventory and the disruptions that go along with it.
Part one is the normal cycle count process of counting small portions of stock during the year. This method of counting is popular among large scale organizations that have a large quantity of items and cannot be closed for a long period of time to perform an annual physical inventory count. However, part two accelerates the normal cycle count process to reveal issues that cost companies thousands if not tens of thousands of dollars each month.
Part Two has companies audit a percentage of items that are handled during the course of the day. These items are consumed internally, sold directly to customers, transferred to other facilities as well as other transaction types. These items generally have a high usage level and by auditing the counts of these items, discrepancies can be identified and resolved immediately. Some of the issues that an accelerated process reveals include issues such as Internal Theft, Shortages from Suppliers, Product Damage and Transaction Errors. By identifying these issues shortly after they occur, companies can take action steps such as establishing new process and training procedures designed to prevent future occurrences.
So by setting up a Cycle Count Program, companies will see the following benefits:
- Quick & Easy to implement
- Less complex than conducting an annual physical inventory
- Minimizes the disruption to daily operations
- Improves operational efficiency
- Faster error detection
Korey Lind is the CEO of Third Wave Business Systems, a firm that specializes in the implementation of business management systems and a leading developer of SAP Certified Integrations for Business One that extend the power of the SAP Business One platform. Korey founded Third Wave Business Systems in October of 1993 after years in the computer software industry, including some time with Price Waterhouse’s consulting group. Her hands-on leadership assures that every client gets the quality service and products they need to help their businesses run more efficiently and profitably. Korey is a member of SAP’s Partner Advisory Council.
The single most effective inventory management strategy companies can use to control and reduce inventory costs is to…
Implement an ERP (enterprise resource planning) solution.
The right solution will enable a company to optimize inventory levels via planning tools that identify when to purchase to fulfill demand, allocate both in stock inventory and incoming purchase orders to specific orders and customers, achieve real-time synchronization of goods receipts and inventory warehouse levels, apply various costing models and/or landed costs to accurately determine gross profit, record goods receipts and issues, track stock locations and transfers, enable consignment, drop-ship, perform inventory and cycle counts, and much more.
The ERP system gives a company the tools to track inventory in the most efficient and effective way. For example, rules can be established to pick the oldest stock first. As stock levels change, notifications can be set up to automatically alert the appropriate employees that they need to replenish inventory to meet customer demand.
A company is able to accurately plan for inventory updates through a guided process called Materials Requirements Planning (MRP), providing a clear vision into gaps between current inventory levels and forecasted demand for each inventory item. Additionally, MRP generates alerts and replenishment orders to keep a company’s inventory at an optimal level.
By tracking and analyzing sales history, open orders and demand forecasts, a company is also able to perform demand forecasting. The ERP system provides a company with the ability to predict demand, based on a multi-level forecast instead of relying solely on actual received orders. These forecasts allow users to foresee future demands for the product and adjust purchases accordingly.
In addition, the ERP system provides a company with the ability to calculate the landed costs of inventory in order to follow more effective pricing strategies. After all, if a company can’t determine inventory valuation, then their pricing strategies are just guesswork, leading to lost revenue.
Mark Breznak is COO of Third Wave Business Systems. His background is in application development and he has founded and successfully run two consulting companies. Mark manages the strategic and tactical operations of Third Wave, ensuring that we deliver our software and services effectively. He holds both an undergraduate degree in Computer Science and a Master’s degree in Business Administration.
The most effective inventory management technique that can help ultimately reduce inventory costs is to…
Gain the business intelligence needed for your business by implementing the right BI solution.
This will help you gain a better understanding of what inventory was sold over time, type of sale (in stock vs. custom order) what are the fastest moving items, and where they being shipped. It will also help you understand your suppliers, including what is the lead time, how quickly suppliers can produce, where the best place to ship given the destinations of the sale. In addition, you’ll be able to determine a target inventory to keep on hand for majority of items as well as have a process that automatically runs to calculate when the best time is for placing orders. At Third Wave Business Systems, we help companies achieve this using BOARD Cube, pre-packaged solutions in budgeting, finance, sales and purchasing, and inventory.
Tom Wheelwright, CPA and CEO of ProVision, is a leading tax and wealth expert, published author (Tax-Free Wealth) on partnerships and corporation tax strategies, and a Rich Dad Advisor/Speaker for Robert Kiyosaki, who wrote Rich Dad Poor Dad. Tom is best known for making taxes “fun, easy and understandable,” and specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes. He has been on the Real Estate Guys Radio Show, Money Radio 1510 Business for Breakfast, written for CEO Blog Nation, and frequently speaks at Rich Dad conferences worldwide. Learn more about Tom and his work at taxfreewealthadvisor.com.
The single most effective inventory management strategy companies can use to control and reduce inventory costs is…
Having and maintaining good systems.
Whether it is just in time or some other inventory management solution, there have to be good systems for quality control, purchasing and tracking of inventory. People often forget the basic principal of good systems, good processes and good procedures in search of a magic pill that will solve all of their problems. Business is all about the fundamentals and the fundamentals begin with good systems.
Hussein Yahfoufi is an Entrepreneur and the current VP of Technology & Corporate Services at OneRoof Energy, where he leads software products innovation, development, support and delivery for employees, affiliates, partners, and customers. His team develops the technology to streamline operational processes (reduce costs), support rapidly growing business (scalability) and redefine the solar industry (innovation). He is also the Founder of DiamPrice and Appsplit. Learn more about Hussein and his work at his website, www.husseinyahfoufi.com.
The single most effective inventory management technique companies can use to control and reduce inventory costs is to…
Increase the number of elements or dimensions you track for each SKU.
For example instead of just tracking location and inventory level, add dimensions like lead times to ship (or replenish) to each location you serve, supply and demand variability based on markets or seasons, months, etc… The more information you can track about each SKU the better analytics you can create, the better you can manage your inventory which will result in savings in the form of more accurate safety stock levels (not running out of stock) or not having aging/outdated inventory.
Dave Kramer is the Founder at AllProWebTools, an all-in-one e-commerce solution for both online and brick and mortar businesses that combines all inventory, customers, leads, and orders between your online shopping cart, in store POS, and mobile devices. Dave has worked with and given advice to hundreds of businesses, repeatedly increasing their profit, and helps business owners set up their inventory management systems.
The single most effective inventory management strategy that companies can use to control and reduce inventory costs is…
The implementation of the right inventory management software tool.
This inventory management software should be able to automatically track the sales on a website AND in store, and adjust the inventory count accordingly. For businesses with a large variety of products, creating custom thresholds is especially important. These will notify the person in charge of supply chain management that a new order needs to be placed before the item is actually out.
Hamilton Powell is the CEO of Crown & Caliber, LLC and the managing member of Powell Growth Capital, LLC, the funding source of Crown & Caliber. Hamilton raised a private equity fund in 2007, Powell Growth Capital, LLC. During the course of his private equity career, Hamilton has bought and sold companies involved in a variety of industries such as logistics services, asset-based lending, consumer goods retail, equipment rental, as well as a host of other Early in 2012, Powell Growth Capital funded and started Crown & Caliber. Based in Atlanta, GA, Crown & Caliber has changed the way individuals sell high end luxury watches. The company offers an easy and rewarding way to sell a high-end luxury watch currently not offered anywhere else, and dubs this service “modern consignment”.
A very effective inventory management strategy that companies can use to control and reduce inventory costs is…
Good old-fashioned accountability.
Holding those responsible for their actions gives them extra incentive to perform their job properly and effectively. For example, at Crown & Caliber, we test a watch for quality before sending it to the buyer. If something is wrong with the watch, we fix it before shipping it. We keep track of exactly which watchmaker works on each watch, holding them accountable for their work and giving them incentive to do it properly the first time. Holding employees accountable encourages them to work effectively and efficiently, helping to control and reduce inventory costs.
Megan Langley is the Director of Marketing at OutMarket, a marketing automation software company.
The number one thing companies can do to manage their inventory costs is to…
Acknowledge the impact of inventory costs. As with any process, you can control or improve it until everyone understand the impact and importance.
Bob Hothem is the Owner of The Alternative Board franchise in Miami Valley. The Alternative Board (TAB) is the world’s largest provider of executive peer advisory boards servicing over 3,000 business owners worldwide. As a large, global network, TAB is affiliated with an extensive range of business professionals.
The secret to effective inventory control is…
Perpetual inventory spot checking combined with an aggressive obsolescence strategy.
Divide your inventory based on turnover. “A” items are the highest demand items, so spot check a number of these on a monthly basis, “B” items quarterly and “C” items annually. This approach should be integrated into the normal routine of those who dispense or re-stock inventory. Every 6 months look for trends in terms of sales. Revisit order points for items that are trending upward to be certain you do not run into a stock out situation. But as importantly, review items with downward trends and adjust reorder points. This will help you guard against having dollars that are tied up in inventory that is no longer moving.
Randall Sander is a Co-Owner and the Director of Operations for Aura LLC (d.b.a. Toner Emporium). He handles all purchasing, supplier negotiation, and inventory management.
My advice is for online businesses. Often, the most effective inventory strategy is to…
Simply not have an inventory at all, which is possible due to the process of drop shipping.
Basically your customer places an order with you, then you place an order with your distributor, and then the distributor ships the order directly to your customer. By finding distributors willing to drop ship, a small business can eliminate all the costs and risks associated with maintaining an inventory. An additional benefit of drop shipping is the reduced shipping costs since the items travel less total distance and distributors often receive shipping discounts.
Toby Farrand is the VP of Engineering and Operations for Ooma, a consumer telecommunications company based in Palo Alto, California.
They key to an inventory management strategy that can help companies achieve reduced inventory costs is…
Diligent and frequent forecasting. It is very easy for unrealistic forecasts to take on a life of their own.
David Waring is the Co-Founder of FitSmallBusiness.com, a site that provides in depth how to guides for small business owners.
The single most effective inventory management strategy or technique that will keep inventory under control is to…
Implement and use an inventory management system.
Up until the last several years these systems could be too costly or complex for the average small business. There are now multiple good inventory management options that are affordable to even the smallest of businesses.
Dr. Tim Lynch is the President of Psychsoftpc, a company that makes turn key Hadoop Clusters and Tesla Personal Supercomputers for big data analysis as well as other high performance computers. He holds the first PhD in Psychology of Intellligent Machines from Boston University, has taught graduate school courses in Japanese management, computer psychology and artificial intelligence and has been the subject of articles in the Wall Street Journal, the Washington Post, Omni Magazine, New York Times, Atlanta Constitution, San Francisco Chronicle and others. He created Artificial Intelligence software for AIDS research for NIH, AI for the DOD and NASA.
The single most effective inventory management strategy or tactic that companies can do to control and reduce inventory costs is…
Predicting when you need what and by how much; this is achieved by good data analysis.
Looking at what people buy, when they buy it, how much they buy and what they purchase along with what gives a better picture of what needs to be ordered or made when and in what quantities leads to the ultimate goal of near just in time inventory.
This analysis can be done through traditional statistical sampling methods or by Big Data Analysis which gives a clearer picture of what the data says by looking at the entire data set not just a small select portion. data should be collected at every step in the sales and manufacturing or ordering process and analyzed for trends.
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