Inventory is a term familiar to businesses of all sizes, from local kirana stores to large retail chains and manufacturing facilities. But what exactly is inventory, and why is it so crucial?
Defining Inventory
Inventory is defined as the collection or the supply of raw materials or stocks or components or finished products that a business carries for the purpose of resale or to produce a product. The essence of inventory is that it enables a business to deliver the products that customers want when they need them. However, effective inventory management is paramount; you do not want cash tied up in inventory or inventory carrying costs eating into profits.
Effective inventory management pertains to controlling the movement of product from procurement to sale to ensure the right product is at the right place at the right time. Poor inventory management can lead to cash tied up in unsold inventory, increased inventory carrying costs, obsolete products and lost sales which can lead to significant financial loss.
In today’s competitive business environment, particularly with the markets being wide open, particularly in a diverse market like India, reducing inventory carrying costs to improve financial performance is imperative. Inventory carrying costs are costs associated with holding and storing goods over time. They can add up quickly and chew away at your profits.
Let’s review strategies to reduce inventory carrying costs and increase your bottom line.
Strategies That Have Proven Effective to Manage Inventory Carrying Costs
Conduct Regular Inventory Audits
Regular inventory audits can help identify excess or slow-moving stock that takes up both capital and space. Physically counting your stock, comparing it to your records, and correcting any discrepancies can help identify when you’re holding stock inefficiently. For example, Shoppers Stop, a leading retail chain in India undertook a regular inventory audit process and identified excess unsold seasonal clothing. By either returning it to suppliers, or marking it down to go quickly, they freed up storage space and inventory carrying costs.
Optimise Order Quantities
The optimization of the order quantities from the suppliers can lower carrying costs considerably. When excessive ordering occurs, enormous inventories pile up. Meanwhile, low quantities ordered create stockouts. For example, Tata Motors set up a Just-In-Time (JIT) inventory system at its plant in Pune. This narrowed their ordering quantities to more accurately approximate demand. With this system in place, excess inventory was reduced, storage costs dropped, and overall improvements occurred.
Leverage Volume Discounts
Many suppliers provide bulk discounts, leading to a lower inventory cost per item. Big Bazaar, a leading retail chain in India, used to buy large amounts of fast-moving consumer goods (FMCG) like rice and cooking oil to take advantage of volume discounts. This would lower inventory cost, and give them the opportunity to pass on the savings to customers with good prices.
Decrease Lead Times
Shortening the time required for goods to ship from suppliers can lower carrying costs. Flipkart, the largest e-commerce site in India, partnered closely with their suppliers to minimise lead times for key electronic or fashion items. Ultimately, they were able to make a smaller inventory carry, thus lowering their storage costs, which also led to shorter turnaround times.
Effective Storage Solutions
It is essential to effectively store inventory, to assist in reducing carrying costs. This means utilising storage space more effectively in order to reduce the amount of storage you need. Maruti Suzuki, the biggest car manufacturer in India, has implemented vertical storage solutions at their plant in Gurugram, India. With the installation of new shelving systems and automated storage retrieval systems (ASRS), they have maximised warehouse space and decreased warehouse storage costs.
Establish an effective safety stock
Leveling inventory doesn’t mean you have to keep no stock. Zero inventory can cost you lost sales, especially if your production is erratic, or if your supply chain is just too slow. You need to maintain some ‘buffer inventory’, which economists call your safety stock, or fill rate. Safety stock is most commonly determined by using a simple model that estimates what inventory you’ll need based on a random demand for your products or services. For example, Fabindia, the popular Indian lifestyle brand, carefully maintains its top-selling ethnic wear. By maintaining higher fill rates, companies reduce customer complaints – Fabindia will never run out of its best-selling ethnic wear.
Conclusion
In the Indian market, where competition is severe and margins are razor thin, reducing inventory carrying costs is critical to financial success. Businesses may dramatically cut costs and increase profitability by conducting frequent audits, optimising order amounts, exploiting volume discounts, reducing lead times, properly keeping inventory, and prudently managing safety stock.
Ready to improve your inventory management? Begin adopting these tactics immediately to observe actual changes in your company’s financial health.
