Reduce Inventory
Inventoro is a tool with several functions that gives business owners and managers the ability to make everyday smart decisions in planning and replenishment. These everyday activities eventually lead to one ultimate goal – inventory reduction.
INVENTORY for the whole company
All warehouse
Keeping optimal stock levels is a smart decision in so many ways, and we will analyze these further in this reading. But before we do, it is important to say that keeping a small inventory hasn’t always been the cool thing to do in running a business. Decades, if not centuries ago, maintaining a large inventory was a sign of a well run business. Large amounts of piled up goods meant that any customer, even aristocracy and kings, could satisfy their needs at any time. What today’s retail, e-commerce, or wholesale paradigm teaches us is that keeping low stock levels doesn’t disqualify any business from serving “kings” as long as they are smart about the way they plan. Sales forecasting is the most important first step in keeping a small inventory. When you know how much you are going to sell, then keeping a small inventory (yet big enough to satisfy demand) is the smart thing to do.
This is especially true with e-shops, where the psychological game of “full shelves” is completely redundant, since each item on sale is represented by a photo on your website.
Benefits of small inventory
Keeping a small stock is cheaper, faster, and more convenient. On the contrary, the benefits of keeping a large inventory are less easy to define. It should be every retail, e-commerce, and wholesale business’s top indicator and goal to aim for inventory reduction. Often, it is the key element of growth.
Cheaper
Faster
Convenient
Cheaper
A small inventory means less warehouse space is needed. Warehouse space is either owned or rented, but either way there is a capital expenditure with no direct effect on profit. It is just plain overhead. More importantly, however, less inventory means less cash needs to be available to buy and hold the goods in the inventory. Let’s say you are a business with a $4 million turnover. Chances are that at any given time, you have $1 million of products in your inventory just waiting for customers to buy those products.
Inventoro can (over time) reduce your inventory size by 20%. In other words, Inventoro can save this particular customer $200,000 in operational cash flow. This money can be used for growth, for marketing, or even a fancy holiday for that matter.
Faster
Every step counts. A pickup from your inventory probably means just a few steps there and back, insignificant if done just once. But if you go there and back several times a day, everyday, several years in a row, then the numbers begin to add up.
As much of a stretch as this may seem, our experience shows (and we’ve crunched the numbers) that time to pick up plays not only a significant long-term role in employee time but also in sales.
Think of it this way. You have a shop, and every time a customer comes to the counter and you have to “go to the back” to pick up the desired item, the customer waits two minutes. This gives you the ability to serve 30 customers an hour at most. If you were able to decrease this time by 10%, your sales could grow by 10%!
Convenient
A smaller inventory plays a role in warehouse management as well. There is less space to clean, less equipment to maintain, and faster and easier orientation within your inventory as well. The bottom line is that a smaller stock makes your life easier.
How to reduce inventory with
Inventoro
Reducing inventory doesn’t happen overnight. It is a long-term process which can be achieved only by making smart everyday decisions. Inventoro can reduce your stock by around 20%, but that requires following our recommendations in replenishment over time. It works like this. When we look at each SKU in your inventory individually, stock levels over time look something like this:
The inventory levels oscillate between “full stock” and “sold out” or “almost sold out”. The peaks on the graph represent the moment your supplier arrives with new goods and replenishes your inventory. This is obviously dependent on how frequently goods are delivered. The time from peak to peak can be a week, two weeks, a month; it just depends.
On the other hand, there is continual demand from the customer, which looks something like this:
There are two critical moments in the chart where Inventoro can be of the most value. The first one is high demand ultimately leading to a stock out. It is this moment:
These situations are not good for your business. They have a double negative effect. Not only was there demand which you couldn’t meet and thus didn’t make profit off of, but this situation also creates frustration for your customers. They came to your shop or to your website ready to buy, only to find that you have let them down by not having the goods in stock.
There are two critical moments in the chart where Inventoro can be of the most value. The first one is high demand ultimately leading to a stock out. It is this moment:
This is also bad. You ordered too much, and now the unsold goods are just lying in your warehouse taking up space and cash. Needless to say, if you sell perishable goods, you risk losing these items over time due to expiration dates. Inventoro focuses on these two points, making sure you avoid them if at all possible. First we look at these moments in your sales history to understand when and how they occurred. Then we do a sales forecast and make sure (based on the forecast) that these moments don’t repeat. The logical response to excessive demand is often just to stock up to avoid stockouts.
The logical response for low demand is simply to order less. But as you see, these two completely contradict each other. The holy grail is to find the optimal middle ground, but that’s complicated, especially when you realize that these calculations have to be done on each item individually.
Optimal Orders make the difference
As we saw from the pictures above, there are two factors which control the destiny of your inventory size. The first is orders. This factor is fully controlled by you. You get to choose how much you want to order from your suppliers and how often you do so.
The other factor is demand. You can’t control demand (at least not completely), but you can forecast demand with a certain accuracy. Forecasting demand gives you the data you need for orders.
Forecast demand and control orders
This is exactly what Inventoro does for you: It forecasts demand with high accuracy. In the Inventoro app you only see the result, because that is the only thing that really matters to you.
What you don’t see is that it took us 15 years to get to this result. The amount of calculations we do with your data each day reaches billions. There are one million lines of code working for you to get to the accurate numbers you need.
The best part is that the longer you use Inventoro, the better it gets at forecasting. It learns your behaviour and your specifics (because every business is specific, right?). So don’t be fooled by the simplicity of the forecasting graph. What happens before we give you that number is far beyond human level intuition and brain capacity.
The forecast is the lowest value for making recommendations on orders, and remember, orders are your way to reduce inventory. They are everyday opportunities to make a significant difference. Follow our recommendations on orders, and your inventory will decrease over time.
How to create an inventory strategy
We have covered the basic principles of inventory reduction, explaining the mechanics of the process and the numbers and logic behind the process. Now we are going to explain how to control the process based on your business strategy.
Avoiding stockouts is generally a good idea, but there are limits to everything, especially when the logic is applied to cost. As a shop owner you may choose to accept a certain amount of stockouts, especially on goods which are not in the ‘Winners’ category of the items you sell.
The element of availability comes into play at this point, or as we call it service level. Service level defines to what degree your product is available to customers. A 100% service level for a certain product means that in all cases, no matter what may come, you will never run out of that product. But that is expensive and increases demand for inventory space.
By looking at the Winners and Losers section of our software, you can quickly evaluate which products account for most of your profits. These products deserve a high service level. On the contrary, other products in your portfolio (Losers as we call them) can easily have a much lower service level, as nobody buys them much anyway.
How to set a strategy for inventory
So basically it is you, the business owner, who decides whether you want to see your customers’ demand fully satisfied at all times. If so, set your service level high. If customer satisfaction isn’t your top priority, set it lower and enjoy larger profits.
With Inventoro this decision is made in the Strategy section, where you get to choose between customer satisfaction and profits. This makes it easier for you. The mathematics of our calculations really results in moving service levels, if only slightly. In our view, a low service level is 95%. This is a typical level we would set on your products categorized as Chasers in our software.
The lower you set the service level, the smaller and cheaper your inventory eventually gets. So, you may ask, how does changing the service level 5% change anything? But the math dictates that maintaining a high service level causes costs to rise exponentially as it nears 100%. The last 0.5% is the most expensive, so the difference is quite substantial, as a matter of fact.
Selling less but making more
The last part associated with Inventoro’s ability to reduce inventory is hidden within the Winners and Losers section of our software. We recalculate this section everyday, and what it eventually tells you is what products make the most profit (Winners), what products are essential to your business but don’t necessarily make a lot of money (Chasers), and what products are your inventory outcasts (Losers).
The fastest way to reduce your inventory is simply by delisting (stop selling) Losers. These are low volume items which sit around in your warehouse for months just taking up space and slowing your business down.
This is not to say that you should ditch them completely. You know best what makes sense. Some of these products can be components of products in Winners or Chasers, for example. You should go through your products one by one, but we recommend that you not be afraid to cut the number of products you sell.
Why you should continue selling Chasers
The logical question which comes to mind after analyzing the Winners and Losers section of our software is “Why can’t we just sell Winners?” Of course you can, but that’s generally not a good idea.
Chasers play an essential role in two factors. First, they are lead generators to Winners. Typically a customer ends up on your e-shop site by googling a Chaser but leaves the checkout with a Winner in their shopping basket.
Also, Chasers create the bulk of your products for sale. The more products you offer, the more satisfied customers you have, since they know your portfolio is large and offers a one-stop shopping experience.
Stay in touch with Inventoro
Supply chain management software can be complicated. We have spent thousands of hours to make it as simple for you as possible. Still, we believe that we can still improve and your feedback on our software is always appreciated. Please contact us in our chatbot or by email. You may also find it useful to read through our knowledge base where we go deeper in the subjects mentioned here.