Holding stock is a costly business. In the first place, money that could be earning interest, at the very least, lies idly tied up in stock – but that’s not the end of the problem. Holding stock means controlling stock, and that has its own set of costs.
And, of course, stored stock requires space that could be used more profitably for something else, and it can be damaged or even stolen while in storage. These are just some of the reasons why it’s accepted knowledge that reducing stock holding costs by keeping just enough to allow your business to run smoothly is the smart thing to do.
Reduce Stock Holding Costs
Putting this into practice can be a lot more difficult than it sounds. There are many variables to consider, among these lead times from suppliers and minimum order quantities required to qualify for wholesale pricing. We take a look at some general tips and tricks that may help you to reduce your stock holding costs.
1. Monitor Stock in Real-Time
Thanks to various systems that automate stock monitoring, it’s easier to order new inputs just in time. Monitoring systems for fuel tanks provide an easy example, and various software systems can be used by both retailers and wholesalers to track stock movements. Of course, digitalization doesn’t negate the need for physical stock takes – but they can be less frequent, and this in itself reduces the cost of holding stock.
Because you aren’t relying on human intervention to report dwindling stocks, you can also reduce the margin of safety you’ve added to the stock level you’ve identified as the reorder point. And since that allows you to have less idle stock at any given time, it adds liquidity to your financial resources.
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2. Track Your Waste
Nobody likes having to dump the stock, and that can make keeping tabs on losses a painful business. However, burying one’s head in the sand won’t make the problem go away. Inputs that get consigned to the landfill or outputs that must be sold at reduced prices or disposed of represent a reduction in profitability, and if you’re running on tight margins, that can be make-or-break.
Analyzing stock losses means more than just noting the value lost – you need to investigate why there are stock losses and determine whether there is anything you can do about it. There usually is a solution that, though it might not completely eliminate stock losses, can reduce them.
3. Declutter Your Storeroom
Over time, your business has probably accumulated at least some “dead” stock. These are items that you don’t currently use and probably never will. Meanwhile, they’re taking up space, and your storeroom (or shop floor) staff is dutifully counting that stock every time there’s a physical stocktake.
Identify these items and either find ways to put them to use or dispose of them. You’ll free up storage space or shop floor space that can be used more profitably, and you’ll stop throwing money at stock takes and maintenance of things you’ll never need.
3. Decrease Lead Times
The time suppliers need, or say they need, to deliver once you’ve placed your order adds to the minimum inventory you keep. As a customer, you have bargaining power, and it’s well worth seeing if you can leverage that to reduce lead times.
In industries where there is little competition, you may find that you just have to put up with the lead times you already have, but if competitors can offer a good price and faster lead times, negotiation with existing suppliers could get you a better deal. Alternatively, you can consider taking your business to your supplier’s competitor.
4. See if You can get Away With Ordering Less at a Time
Placing smaller orders with suppliers more frequently reduces stockholding risks, but negotiation may once again be necessary. However, suppliers are often willing to consider reducing their minimum order value if you’re a good client. That means they’re sure that you’ll order a significant amount over time, and won’t keep them waiting for payment.
On your side of the deal, you’ll need to be sure you can stay on top of your stock levels since you’re leaving a smaller margin of materials on hand. You also need to test your supplier on shorter lead times – even if they agree to it, you still need to verify that they will deliver to specification. Have a backup plan until you’re sure that the new policy will work out as agreed.
5. Review Suppliers at Regular Intervals
Just as we measure workplace performance for staff, supplier performance should also be tracked and reviewed. This includes lead times and prices as well as the reliability and quality you’re getting from each of them.
At the same time, you’re checking out alternative suppliers, either as leverage in negotiations with existing ones or with an eye to switching to a better option that allows you to hold lower stock levels while still receiving reliable service and acceptable quality. Supplier relations are hugely important in business. Partner with suppliers who have your best interests at heart and are willing to go the extra mile for your business.
Getting the Balance Right isn’t Easy, but Will Boost Your Profits
Holding the lowest possible amount of stock to reduce operating costs can work very well, but running out of stock can be risky too. Determining the right stock level at which to place a new order with your suppliers is essential, and knowing how much your business should produce to meet market demand should include a margin of safety.
In terms of production inputs, how big that margin should be will depend on the input’s importance to your business operations and whether it is readily available from other sources. When it comes to outputs, you want to know that you can satisfy market demand, and that means tracking surplus and shortfalls and adjusting production accordingly. As with all things in business, it’s a calculated risk.
Playing it too safe could mean lost opportunities. Taking too much risk could be even more costly. However, approaching stock reduction with caution will always be better than ignoring the issue altogether. Business is about making money work for you. Keep your finger on the pulse!