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How to cut your inventory costs

Read time: 2 minutes


Most business owners know that keeping inventory costs down provides a significant competitive advantage. However, day-to-day challenges often make it hard to reach this goal.

Properly managing inventory starts with the right information. This includes data regarding high-value items in stock, inventory turns, carrying costs and which suppliers offer the most attractive logistics and financial terms.

However, accumulating that information is not always easy. That’s particularly true for smaller businesses, which cannot afford to maintain sophisticated reporting systems and are thus forced to resort to periodic counts and visual estimates.

Know your ABCs

One common technique entrepreneurs can use to bring down inventory costs is for managers to roughly group their inventory into A, B and C categories in order to figure out where to best allocate resources.

“A” items are high-cost and process-critical items that comprise 80% of many companies’ inventory value, but usually only 20 to 30% of the inventory quantities. This category deserves the most attention in terms of tracking due to its high inventory value.

In many cases, conducting accurate and timely cycle counts of these goods will enable businesses to cut the dollar value of their inventory levels by between 40% and 50%. Less important are B and C items that are necessary for the business to stock, but which generate medium or low inventory value.

Managing delivery

Keeping track of which suppliers are willing to provide "just-in-time" shipments is also key to controlling inventory. Companies need to understand at what point in the process inventory items are needed and work with their suppliers to have these delivered as needed.

Companies can understand their processes better by using value stream mapping to determine the best time to receive inventory items. This allows companies to reduce their work in process and inventories and will lead to improved cash flow.

You should encourage suppliers to make deliveries as close as possible to the date you need them. The perfect situation is when you can arrange for your suppliers to ship goods to your customers directly, where practical.

Inventory control systems

One of the hardest decisions for many entrepreneurs is whether to invest the time and resources required to implement and maintain, up-to-date computerized inventory control systems.

Often that decision depends on a business’s growth stage. However, the high cost of carrying extra inventory should make gaining full control a priority.

That process starts when managers insist on getting optimal inventory-related information.