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How to Maximize Inventory Volume and Minimize Inventory Cost
Written by Super User
Published: Thursday, 06 March 2014
The cost of carrying inventory is a ratio which describes the relationship between the cost of owning inventory per year and the inventory value. The rule of thumb for inventory carrying cost is between 20% and 30%. For example, if your inventory carrying cost is 25% and your annual average inventory is $1M, then your annual cost of owning inventory is $250K. In reality, inventory carrying cost is different for every business as the variables are different.
A business's inventory policies drive two types of costs: operating expenses and working capital requirements. Keeping inventory cost under control is important to the financial well being of any type of business operation.
By keeping inventories as lean as possible without causing problems for production or order fulfillment, you can manage inventory costs effectively. Avoid tying up financial resources in large inventories that will not move immediately, while also keeping your taxes to a minimum.
At the same time, maintaining an abundant number of inventories that are easily accessible to store shoppers is very important to retailers, since customers buy more when they see more. And a large and wide variety of inventories attracts more shoppers to the store.
It is an art to find the balance between controlling an optimal volume of inventory to reduce cost and providing sufficient inventory to sell at the same time.
In situations when the market fluctuates, including shifting style and trends, seasonal factors, shopper traffic drops, adverse competition or general economy changes, businesses sometimes find that a large amount of inventory in the store can not move, or move very slowly over a long time. Over time, if a business's working capital is tied up in the stagnant inventory that cannot sell, while the operational costs exhaust a business's remaining capital, a business will not be able to sustain itself, and will have to shut down.
In the current economic landscape, there are too many factors affecting a business's performance, and it is becoming increasingly difficult to maintain a good inventory flow and provide a healthy working capital turn around for a business.
How do you maintain a healthy inventory flow?
Cojoy Media has created Showcasz, a platform that provides a simple and easy way for retailers to generate Digital Catalogs with their inventories, and serve as the retailers' exclusive in-store sales tool.
The software package also provides customers with CojoyMedia’s Virtual Fit tool, a proprietary technology that lets shoppers try on products and fit these products to their space. With Showcasz, a shopper can browse and try on hundreds of products in just a few minutes.
This has proven to be a major benefit to vendors, as shoppers are more likely to purchase when they can actually visualize how the product will look on them or in their home setting. Additionally retailers can gain more insight into a shopper's preference for different products, give them a real sampling experience and incentivize sales with offers and discounts customized to their taste - all in one place.
The enhanced feature of Showcasz provides a report for retailers regarding how many times a product has been tried on by customers, and how many times it has been saved as a favorite item by the customers. This provides critical information for retailers to decide what inventories that should be keep on hand in order to meet the demand.
Retailers can use the Showcasz as their sales tool to optimize their store performance.
1. Employ the concepts of aging and usage to the inventory. Aging has to do with how long an item remains in inventory before it is sold to a buyer. Usage provides details on how often a given unit is favored by customers and how many units must be kept on hand in order to meet demand. Planning purchases around these two factors will help prevent accumulating too many items in an inventory and help keep the total value of that inventory within reason.
2. Store excessive inventories digitally. Discuss order fulfillment with vendors. When inventories are stored digitally, a retailer can showcase an extensive amount of inventories in their store. And fill in the orders when items are sold to the customers. This reduces the stagnant inventories stored in the store, and opens up the option of only stocking the inventories that move fast, while holding inventory levels closer to only what is required to support the desired customer service level. As a result, this strategy frees up the working capital for a business.
3. Maintain an accurate inventory at all times. A digital catalog can be updated regularly with the vendors' database. This is much easier to maintain and synchronized among different store locations.
5. Process items no longer needed for obsolescence. Accurately processing useless items for obsolescence will lower inventory cost significantly in some cases.
6. For purchased products, getting a handle on your acquisition transaction costs can either reduce average inventory or allow for reducing purchasing and receiving labor. When a shopper orders a item that is not stored in the store, the retailer can handle the transaction, and request the vendors to directly deliver the item to a customer's home. In this case, the inventory acquisition cost, storage cost and processing cost are reduced to almost none.
7. Base safety stock on customer service. Stocked inventories that are frequently favored by the shoppers, using the appropriate number of product storage, updating safety stock levels dynamically, and basing the service levels for each products on the financial goals of the business all serve to reduce safety stock inventory or out-of-stock situations and increase revenue.
There are numerous ways to take better control of inventory and decrease its associated costs. The key to managing inventory successfully is to continuously measure your performance and look for new ways to improve.
These strategies should get your organization thinking about what it can do to lower inventory costs. Many of these strategies may seem challenging, and by using Showcasz, we provide an easy way to implement these strategies, so that they will work for you.