Inventory Reduction Best Practices

In today's economy, inventory reduction is a key strategy for any company. There are two primary methods available for inventory reduction;

1) cut down on inventory holding expenses

2) apply it to either the total volume of goods in inventory or the current on-hand inventory.

Both are equally important considerations that must be taken into account by businesses to improve their bottom line. However, the degree to which companies are willing to reduce their inventory levels will vary greatly. The following tips address inventory reduction through the first two strategies.

Reduce inventory levels The first strategy for inventory reduction deals with reducing excess inventory. This relates to the overall inventory levels of a company's warehouse. A warehouse may be kept adequately stocked in order to meet delivery times. If that is the case, then it may not make sense to reduce inventory levels. It makes more sense to consider moving some goods inside the warehouse to a location where they will be sold more quickly. That way, customers do not have to wait for their order to arrive at their doorstep.

One example of a company who may want to reduce inventory levels is a manufacturer of medical devices. Medical device companies usually have an extensive inventory of obsolete medical devices, outdated supplies, and obsolete lab equipment. If all of these items were simply thrown out, then the company would be incurring a loss of approximately $200 per day due to the amount of money required to maintain the inventory. Therefore, it makes much more sense to sell some of the obsolete supplies to another medical manufacturing company for a profit instead of throwing them away.

A second strategy for inventory reduction is to move some of the less used inventory to the warehouse. This may involve the moving of inventory that is rarely used. For example, it may make more sense to sell some of the inventory of spare parts to a distributor for less money than to keep them in stock and potentially sell them to customers at a later date. In addition, by selling the spare parts, the inventory reduction may allow a company to free up some storage capacity. If the inventory reduction is very limited, then it makes more sense to leave some inventory in inventory than to have it sit in the warehouse unused.

In addition to reducing inventories, companies also need to consider other factors when determining whether it is cost effective to reduce their inventories. One such factor is analyzing the time required to replace an inventory with new inventories. Although it may seem like a small detail, analyzing the time necessary to replace an inventory can often make a major difference in overall inventory reduction strategy.

The first step of reducing inventory is to carefully analyze and identify the different types of inventory reduction that are necessary. Ideally, each type of inventory reduction should have a significant impact on the company's overall profit margins. Therefore, the inventory reduction should be carefully tied to the lead times to reduce inventory. Typically, a company should reduce inventory lead times by as much as possible. However, if a company has extremely long lead times, it may not be cost effective to reduce inventory levels.

When evaluating the effect of inventory reduction on company profits, companies should also consider the impact on employee profitability as well. As a manager, it is likely that you have a few employees who do not perform as efficiently as others in your department. For this reason, it is important to reduce inventory lead times to the greatest extent possible. In order to determine the best practices for reducing inventory lead times, it will be necessary to implement processes that specifically tie the reduction of lead time to the profitability of the company as a whole. Therefore, the inventory reductionist should first work to improve overall employee efficiency, then develop a method for reducing the lead time and finally integrate all efforts to reduce inventory to a high degree.

A good example of an inventory reductionist tool would be a stock leveling tool. This inventory tracking system allows a company to determine which departments are providing the highest level of merchandise for their customers while also identifying department overstocks. For example, it could identify departmental warehouses that are carrying too much inventory that can be eliminated. Once the inventory tracking system identifies departmental warehouses carrying obsolete stock, the reductionist can make recommendations for reducing the inventory levels.

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