Small businesses not involved in selling perishable goods can be tempting to order and have surplus stocks to meet market demands. In certain situations, it can be a good thing to have excess stock.
Nevertheless, having more items than you can sell can pose many problems, leading to poor cash flow and high carrying costs. To avoid these, you need to implement relevant measures that would help minimize your inventory
Benefits of reducing inventory
When you decide to reduce your inventory for your small business, it comes with many benefits that can increase your sales and productivity.
Here are a few benefits of reducing inventory.
- You minimize your cost
- It enables you to reduce your workforce, which can improve your efficiency
- Improve the quality of your service to customers
There are several ways to reduce your inventory for your business. However, most of these methods aren’t as effective as the ones we mentioned below.
How to reduce inventory for your business
Reduce demand variability
About 20% of their stock produces 80% of their revenues for most small businesses. These statistics will differ to a certain degree.
According to the ABC inventory analysis, you can classify your stock into three categories based on their value to your business. The A category represents stocks that are essential to your business; C are items with the least value, and B offers better value compared to C. therefore, you prioritize the stocks in the A categories. Over time, you can review these products and move them to another category to improve lead time.
Make Smaller orders
Reducing your order cycles can help reduce your inventory as a small business. Furthermore, it will help in improving your inventory turnover. Small but frequent ordering gives you the flexibility to meet customers’ demands while preventing excess stock and carrying costs. Nevertheless, if you decide to implement this strategy, you need to use a reliable inventory forecast model that utilizes seasonality and trends.
Another option available at your disposal to reduce inventory for your small business is to use dropshipping. Dropshipping allows you to buy the product only when a customer has placed an order and make payment. It means you don’t need a warehouse to store your products, which helps to save your costs.
Furthermore, you can even create a fully automated dropshipping store
Reduce supplier lead time
Your supplier lead time can affect the amount of stock you have in your inventory. For instance, if you have a continually fluctuating lead time, you will have to carry out more safety stock to ensure you cover the risk of running out of stock while waiting for delivery. The recent COVID-19 pandemic affected many businesses in the United States due to increased lead time.
However, it gives you flexibility with faster and reliable lead time when you want to order for inventory while reducing your stock levels and other costs. Today, you can utilize the software for your supplier order management to automatically track your lead time and adjust safety stock when necessary.
Start allowing backorders
Backorders can help you cope with customer demands while holding less stock. Be sure to follow backorder best practices and create a clear backorder policy to build an enjoyable experience for your customers.
You might need to invest more in supplier relationship management in order to secure expected delivery dates of backorders.
Eliminate outdated inventory
Outdated inventory products are products your customer doesn’t demand again. Most times, you would have outdated inventory if the new model supersedes the previous one. Another reason for obsolete inventory is fashion or technological change in society. For instance, there was a time when Nokia button phones were the order of the day. However, with technological advancement, we saw the rise of android phones, which have ripped out the Nokia button phones out of the market.
Therefore, to avoid any outdated inventory, you need to understand the lifecycle of products in your store. It can sometimes be hard to monitor these, but you look at for launching sales and promotions to make adjustments when newer products are about to hit the market.
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