Reducing Inventory Management Costs

Feb 18, 2009 2:09 AM  By

Managing inventory is always a balancing act between overstocks and backorders. But there are steps you can take to improve the process, which can result in lower costs and higher service levels.

In part one of this series you learned you learned about the high price of backorders and the importance of establishing benchmarks for performance and reviewing your analytics. The four main benchmarks we covered include annual turns; backorder rate; overstock rate; and initial fill ratio.

Once you’ve established the parameters of each of those benchmarks and set your analytics accordingly, you can then look for ways to reduce your costs without sacrificing service.

Here are some tips to get you started:

–Revise your ABC inventory management system to include D items: If you don’t have the ABC system in place, start using it now. “A” items are your top selling products. They should never (and I mean never) be backordered.

It used to be relatively easy to identify A products because they were your top 20% selling products. The Internet changed that. It varies by company and product lines. “B” items bridge the gap between the never outs (A) and the never overstocked (C). “D” items are the ones that drive traffic and acquisition, but don’t fall in the A, B or C categories.

–Improve vendor relations and management: Good relationships with your vendors make inventory management much easier. Make sure that every one understands your expectations on quality, pricing, and delivery.

Keep an open line of communication at all times. This relationship begins with the initial purchase and continues through the life of the product.

In most companies, there is a progression from the sample buy to inventory management. It usually includes changes in personnel. Create and maintain specification sheets so that there is consistency from beginning to end.

–Find new ways and expand existing ones to reduce costs and improve service: Drop-shipping is a great way to satisfy the demands of a Web 2.0 market. It allows you to improve product selection without increasing costs.

You can test new lines and categories without risking overstocks via drop-shipping. It is a terrific solution if you have good vendors with reliable service. But if you choose to start or expand drop-shipping, make sure that you have someone monitoring service levels.

–Renegotiate with your vendors to insure the best return: Ask for case-lot pricing without minimum quantity requirements. It reduces your costs and your overstock risks. Review your purchases on a dollar and unit basis. Sometimes quantity or volume discounts are available.

Remember that inventory management requires a continuous improvement philosophy to be successful. Small gains create a ripple effect that contributes to growth and profitability.

Debra Ellis is the founder of Wilson & Ellis Consulting (, which specializes in improving customer acquisition and retention using marketing, analytics, service, and strategic planning.