Any small business owner understands that an increase in demand means something good. It is a sign that you are making progress and customers are noticing you. However, it comes with higher overheads and costs, especially if you have small storage. To increase your growing inventory, you need to a significant amount of cost. Therefore, minimizing your inventory cost is a great way to free up space and reallocate your business capital.
It is a daunting task for most small business owners because the cost of managing inventory is very high. You have to pay for the warehouse, account for shrinkage, breakage, and quality control can be expensive. Perhaps, you are contemplating how to cut these costs when you want to add new products; in this write-up, you will learn a simple trick on how to reduce your inventory holding cost.
How to Reduce Inventory Holding Cost
If your small business is experiencing extreme growth and you don’t want to be cut off guard, you can implement the following techniques to minimize your inventory holding costs.
Find the right reorder point
When you understand the perfect time to reorder products and the exact volume you need, it is easier for you not to over hold more inventory than expected. To get your reorder points, you can use a forecasting tool to help you look through past sales data. This data can put into consideration the seasonality geography and channels most customers prefer to buy. According to a recent study, having insight into your previous sales pattern helps reduce inventory costs.
Avoid overstocking
If you spend a large amount of money replenishing your stock, there is every possibility that you are missing out on opportunities for your business to grow. Suppliers often offer discounts for large volume orders, promotional items, or deals on a new item. Is it hard to turn down all of these offers? Well, you can.
Initially, it might look like you are saving money when you accept any deal or discount since you will eventually reorder products in the nearest future. Nevertheless, if your product always remains on your shelves, you might subsequently experience a deadstock situation. It means you have to pay for the products in your storage. To minimize your inventory holding cost, you should only order the exact quantity you need while using any remaining capital to diversify your inventory.
Reduce supplier lead-time
In a situation where your store has high supplier lead-time, you would need additional storage space to accommodate all orders. It means you will have to get more space for these products. However, when your supplier offers a lower lead time, you have the flexibility to make orders. With this, you minimize stock carrying costs while reducing the risk of holding goods that can become obsolete.
Use inventory management software
Starting your new online business can be challenging, especially when you want to forecast customer demand. You can leverage inventory management software to enable you to analyze and understand how each product performs. Today, there are several cheap inventory management software to use that will help you reduce inventory holding costs.
Use Backorder to lower Inventory Holding Cost
Another method to save inventory holding cost and space is allowing backorders on your site. This method has both pros and cons. So you should calculate backorder cost carefully to make sure it is below inventory holding cost.
Following backorder best practices and finding the right tool to manage backorders will assist you greatly in cost optimization.
