As an entrepreneur you are busy every day making a profit. Not only turnover contributes to this, but lowering your costs also means that the operating result shows green figures. ‘Lowering costs’, what does that include? Well, consider optimizing internal processes. While this is often underestimated, it can contribute significantly to profitability.
This way you can make significant efficiency gains by, for example, automating the business processes. But there are also company-specific options. For example, companies that need to store goods for purchasing or producing goods have inventory optimization as the main potential cost saving.
Stock is expensive. On average, it makes up 40% to 50% of the investments by producers and trading companies. Inventory costs are simply the costs that a company incurs to maintain inventory. In short, the sum of product costs and storage costs.
Do you also want lower inventory costs? Then follow the 6 steps from this blog!
Step 1: Clearly map out your inventory costs
You want to reduce inventory costs. Then it is first of all important that you know where the costs come from. The inventory costs consist of 3 parts:
- Interest or cost of capital
These are the costs that arise because capital is stored in the form of stocks. After all, capital that is fixed in stock cannot yield returns for the organization in any other form.
- Space costs
These are the costs associated with the physical storage of inventory in a warehouse. This includes rental costs for a building, energy costs, costs for storage racks, depreciation on, for example, means of transport and costs of staff.
- Risk or aging costs
These are the costs that arise because goods become less valuable. Depreciation can occur due to damage or because goods are no longer needed. This also includes insurance for the goods.
The total inventory costs are generally expressed as a percentage, calculated by: (interest costs + space costs + risk costs) / inventory value = inventory cost percentage. However, by splitting the cost of your inventory into these 3 parts, you can ask the critical question: which of these parts can I save on?
So make sure you have a clear picture of where the costs for stock are going, so that you can then cut costs with this insight. In addition to the physical stock, it is also crucial to look at the internal processes. Which brings us to the next step.
Step 2: Make an inventory of the current process
Do you have inventory costs? Then it is important that you follow the internal (logistics) processesmaps. Make sure you know exactly which actions or actions are taken for, for example, the delivery or production of a product. Think of raw materials, semi-finished products, parts, but also all actions performed by human hands. Record the process (or processes) in a schedule. Then the goods must be arranged according to size. Think of turnover, order size, turnover rate, number of orders, shelf life, etc. Which quantities should be used? That of course depends on your process. With a view of the ranking, you can gain insight into the impact that goods have on inventory costs. This way you can set priorities in optimizing stock management.
Step 3: Predict supply and demand for an optimal inventory forecast
We cannot look into the future. As a result, it is impossible to say how many products you will sell on average per month in the future. That’s why we have to look to the past:
How many products have you sold on average per month?
Were there any outliers?
And if so, what could be the explanation for this?
Will the trade remain stable, or do you have to buy more and more?
How have you responded to unexpected shifts in demand and / or supply?
Are you unable to answer the above questions? Then you do not have sufficient insight into the demand and supply of your goods or products , and you cannot make a stock forecast. It is not without reason that warehouse managers, shop managers and stock managers are often not a fan of the word ‘forecast’ or ‘forecasting’. Management expects them to make accurate predictions, but a good tool for this is often lacking. No manufacturing and trading company can avoid making a good stock forecast, so it is crucial to find a solution for this.
Data helps to make good stock forecasts. The longer you have been active in an industry, the better you can make the estimate. So look back over a year. Involve other departments as well. Marketing and sales, for example, may have provided a temporary boost by promoting your product or offering promotions. And takes into account trends or seasonal influences. Also take a look at figures from external sources such as Statistics Netherlands .
Step 4: Determine the minimum and maximum stock levels
You have been able to make a good prognosis based on an extensive analysis. Now you can determine the minimum and maximum stock levels. An important question here is: how much must there be at least in stock to always meet demand? You can adjust the purchasing and ordering cycles and quantities accordingly. Make efficient use of flexible delivery times and ordering frequencies, for example.
You can also minimize surplus and obsolete inventory. For example, engage marketing and sales to stimulate the sale of goods or items before they become obsolete.
Remember: the customer is king. In your pursuit of an optimal stock level, your service levels should not be compromised. Understand the customer needs of your customers when it comes to, for example, delivery times or availability.