Managing Costs During an Economic Downturn
In today’s cost-conscious business environment, finding new ways to save money and improve efficiency can be challenging. Often, the most effective strategies are the simplest, starting with optimizing existing resources. Managing what you already have in place can be one of the best starting points for cost reduction.
Reviewing how your stock is managed is an excellent way to make a measurable impact on your bottom line. If your business struggles with excess stock or loses out on contracts due to inability to fulfill orders, it’s time to re-evaluate your inventory management.
Industry estimates suggest that carrying inventory costs a business around 25% of the stock value annually, whether it’s freeze-dried fruit or stuffed animals. For example, a business holding $1 million in inventory will face $250,000 in yearly costs due to warehousing, insurance, administration, and more. For e-commerce startups on platforms like Shopify or Samcart, this could be a tough cost to bear.
Improving Stock Management
Optimizing stock turnover is challenging, but there are strategies businesses can use to better manage inventory, ensuring products are available when needed without sitting on the shelves too long.
Striking the right balance between having enough inventory to meet demand and keeping stock levels minimal can be difficult. Over time, the risk of stock becoming obsolete also grows. This issue is particularly significant in industries like fashion and technology, where trends and advancements change rapidly. In such cases, the depreciation of stock can be as high as 90% of its original value. For instance, Packard Bell faced obsolete inventory when customers started demanding faster PCs than what they had in stock.
On the other hand, failing to meet demand leads to customer dissatisfaction and missed business opportunities.
Any costs incurred due to inefficient stock management are ultimately passed on to the customer. Therefore, implementing leaner processes helps businesses remain competitive, not only in terms of pricing but also by offering faster delivery and new product development.
Key Factors for Optimal Stock Levels
Achieving the optimal stock level requires balancing several factors, including estimated demand, the required service level, and the supplier’s lead time. While this may seem straightforward, forecasting is often complex, especially with new product lines that lack historical data. Additionally, shortening lead times with suppliers—particularly those in the Far East—can be challenging when bulk ordering is necessary to achieve economies of scale.
Investing in the Future
If you haven’t recently optimized your inventory, this is a good area to focus on when looking for cost savings. Improving forecasting methods can help businesses manage their stock more effectively. Tools are available to assist with this process, and for companies able to invest, a managed Electronic Data Interchange (EDI) system can be highly cost-effective.
Reducing inventory should not be viewed as a one-time exercise; it should be embedded into the company culture and practices. Businesses that make this a continuous focus often see 30-40% reductions in inventory during the first year.
Exploring Additional Cost Savings
While not every business may find stock management to be the ideal focus for cost reduction, there are other areas worth examining, such as order processing, auditing, or operational expenses like business insurance, telephone systems, or IT software.
‘Just in time’ (JIT) production is often cited as an example of how to optimize production in line with demand. While JIT may not suit every business, its principles can be adapted to create a leaner, more efficient operation.
Companies like Dell and Toyota have successfully implemented JIT. At Toyota, raw materials don’t reach the production line until an order is placed, allowing the company to react quickly to market changes while reducing inventory-related costs.
This approach doesn’t compromise quality; instead, it shows how scrutinizing internal processes in response to external pressures can reduce waste and create streamlined, efficient systems that maintain high standards.