When it comes to wholesale distribution companies that deal with non-perishable goods, overstocking over the course of the year can sometimes be seen as a good strategy to meet customer demands. Under certain circumstances, overstocking can help avoid backorders, ensure a steady revenue stream, and provide a bit of respite in the event of a disruptive event. However, stock redundancy will almost always come at a cost and should be considered as a temporary and expensive logistics management strategy.
Keeping redundant stock inventory will mean added logistics costs in terms of manpower, warehousing space, and the overall reduction in operational quality. It’s also important to keep in mind that, at some point, finance teams will have to sort through your excess inventory levels and stock items that no longer have any customer demand. For most distributors that deal with high volumes of items, costs at all levels of the supply chain need to be managed and contained to ensure at least a narrow profit margin.
The Benefits of Reducing Inventory Levels
It should go without saying that extra inventory will increase storage costs. You will need to pay for the space, as well as the other resources that go into holding and handling the inventory. But if you manage to reduce inventory, you will not only be able to enhance your available space; you will also increase your bottom line without having to increase the total number of sales.
Another added benefit of reduced inventory levels is the overall flexibility it has to offer. As product life cycles become shorter with every passing year, inventory flexibility is an absolute necessity. Whenever a company orders too much of a product that will become obsolete in several months, they will be left with unused stock that ends up taking up space and resources. As such, having a reduced amount of inventory in line with the product life cycle is the balance that needs to be found in this situation.
It’s also important to keep in mind that unused inventory results in waste. Whenever you order too much inventory, and it ends up in your warehouse collecting dust, you not only lose profits but have to find a way to get rid of it. If you are dealing with perishable items, they will go to waste pretty quickly. There may be a possibility to mark down the items, but your customers may expect it from you again in the future. By reducing your total inventory, you will reduce your costs and your waste.
How To Decrease Inventory Levels with Effective Logistics Management
There are several effective ways of reducing inventory that can be implemented by a distribution center as a means of driving costs down. Among these inventory reduction strategies, we can include the following:
● Prioritizing Stock and Eliminating Obsolete Inventory
While this may seem obvious and somewhat simple to implement, it’s not always done effectively. By prioritizing stock, you should assess the items that are being sold in high quantities and determine which ones are becoming obsolete. Your company will be in a better position to order stock that actually meets customer demand, which means less storage space will be used by unsold stock. By reducing your obsolete stock, you will be able to maximize the space for the products that have a high turnover rate and won’t tie up your warehouse space for prolonged periods of time.
Obsolete items typically occur whenever a new product launches onto the market or when customer demand patterns change due to unforeseen circumstances. The launch of a new iPhone, for example, will drive the demand for the previous model down. Therefore, it’s advisable that businesses monitor product life cycles for all of their inventory and track how demand variability changes over time. By doing so on a regular and continuous basis, businesses will be in a better position to forecast demand and reorder items based on actual future sale potential.
● Reducing Supplier Lead Times
Another effective way of keeping stock levels down is by negotiating faster lead and delivery times with your suppliers. Alternatively, you can look to identify additional suppliers that are able to meet a quicker replenishment strategy. When you’re dealing with high supplier lead times, it also means that you need to secure a redundancy stock to ensure that your orders will be fulfilled. On the other hand, faster lead times will give you more flexibility when reordering, while allowing you to hold less inventory. This will also help lower the short-term carrying cost and the long-term risk of your inventory becoming obsolete.
You can also look at your average lead times when divided into separate stages. This will allow you to identify where time can be saved. You could be experiencing long lead times during the ordering process, in which case it may be worth examining how your business orders from suppliers. If you are ordering your stock at the same time each month, it may indicate that there are inventory system limitations preventing you from ordering stock when it’s needed. Updating your software technology may help solve these types of inefficiencies.
In any case, accurate demand forecasting and purchasing practices can support your strategic goals to meet customer demand, while doing away with carrying extra inventory. By increasing your communication with suppliers, you will be able to negotiate better minimum order quantities (MOQs) so that smaller but more frequent orders will offset the long-term risk of inventory obsolescence. This practice will also allow you to pivot faster whenever unexpected variations in customer demand patterns take place.
Centralizing Your Inventory Control
Most distribution and logistics networks will have multiple levels when it comes to their planning models managed by various management tools. Therefore, managing these multiple levels of inventory optimization can become difficult without the use of some form of optimization software. These digital solutions provide analysts and other supply chain consultants with accurate models and a full inventory plan, such as optimal safety stock levels, cycle times, cycle stock, and forecast demand projections.
Businesses can also use these supply chain solutions to predict and set their target service rates, inventory level, and their redistribution capabilities if they need to transfer items between various warehouse locations. This will help to prevent both excess and obsolete inventory, while also increasing the global item-level visibility for better planning and procurement strategies.
While all of these logistics management strategies will be effective in lowering your overall stock levels, an ongoing inventory analysis will be needed to make sure that you keep the optimum levels at all times. If you need help optimizing your warehouse management, Redbird Logistic Services is here to help. Contact us, and let’s get started today!