Best Practices for Reducing Warehouse Inventories
Your warehouse inventory is a considerable and visible asset for your company, and it’s possibly also the most valuable item on your balance sheet. There is often pressure on supply chain managers to shrink excessive levels, resulting in reductions that aren’t carefully evaluated in advance.
Diminished inventory can have a significant impact on your entire supply chain, which is why such a serious decision shouldn’t be undertaken arbitrarily.
Excess inventory can be just as much of a problem.When you have too much, it shows up on your company’s financial statements, alarming executives and stakeholders concerned about the value of their investment. While they see high inventory levels, they don’t consider supplier lead time, forecasting and hidden costs of shortfalls.
In addition, the expense of storing excess stock is two-fold:
- The value of the product not sold; and,
- Warehouse fees, maintenance, utilities, insurance and other costs.
In light of the consequences of maintaining too-high or too-low inventory levels, it’s essential that those involved with supply chain management find a sustainable balance. If this means reducing your current warehouse inventory, there are a few approaches you can take to do it wisely.
- Evaluate inventory by sales.Classify your top four sales items into categories according to what proportion of revenue they generate. Then, add up the value of your inventory in dollars for each group. You should come up with a clear view of whether you have sufficient inventory to satisfy demand. If 70% of your stock on hand represents your top seller, this may be unsustainably high for the item and it’s time to consider reductions.
- Evaluate sales against inventory.The same approach applies in the reverse when determining proper warehouse inventory levels. Here, you’re looking at whether stock taking up the most space in your warehouse represents your highest selling products. If not, your inventory is out of balance and should be adjusted accordingly.
- Adjust order cycles.If you can coordinate smaller loads with more frequent order cycles within your supply chain, you’ll automatically carry less stock on hand. However, this solution doesn’t work for all industries. You need to balance any loss of efficiencies by shipping smaller hauls, and determine whether the model will impact manpower at distribution centers.
- Eliminate obsolete inventory.Surprisingly, many companies continue to stock items at their warehouse for a variety of reasons. Sometimes, it’s intentional, as in the case of executives who don’t want to write it off the books as a loss. Other times these items are simply overlooked and management doesn’t want to own up to the mistake. No matter the reason, out-of-use items constitute excess inventory that actually cost your company money in the long run. Those looking at the short term asset write-off as an unacceptable expense don’t realize the impact of too-high inventory levels on your entire supply chain.
- Reduce service levels.While this might seem like a contradictory approach, lowering your service levels actually makes sense when you consider customer need. For instance, if your customers don’t require their entire order in one shipment, you might be able to break it up. Also, there are customers who typically request a short lead time because it’s customary, not because it’s necessary. Understanding your customers can actually help you lower inventory levels and be more responsive to their needs.