3 Steps to Master the Art of Lean Inventory (and Cut Costs)

Did you know the average retailer is battling inventory carrying costs that add up to 20-30% of their total inventory value?

On top of other rising operational costs, wider economic uncertainty and wavering consumer demand, it’s putting extra pressure on the already strained high-growth, low-profit models many merchants operate under – and pushing many to the brink.

Cash flow is critical for the survival of every business – but every dollar tied up in inventory is a dollar that can’t be spent on salaries and rent or invested in new products and expansion.

Things are so tough that retailers, on average, are holding just 19 days of cash – causing a precarious cash flow situation for around half of retailers, according to research from Inventory Planner by Sage.

In fact, leading retailers – from Gap and Walmart to Joules and ASOS – have recently hit the headlines after running into major problems linked to holding too much inventory.

 How to work out your inventory carrying costs

Wondering how your own holding costs compare to the average? Use this formula:

Inventory Holding Cost = (Storage Costs + Employee Salaries + Opportunity Costs + Depreciation Costs) / Total Value of Annual Inventory.

A lean inventory is key to achieve profit and growth, retailers must now focus more than ever on cutting costs, optimizing warehouse space and achieving a lean inventory.

This will cut the expense that goes hand-in-hand with dead stock and free up capital that can be spent on anything from new products to mitigating supply chain bottlenecks.

Proving this point, Tom Kingsbury, CEO of US department store retail chain Kohl’s, recently spoke out about the brand’s efforts to cut inventory by 14% after struggling with carrying costs.

After purchasing got ‘out of control’, Kingsbury announced an initiative to make bold cuts to stock levels and said he spent a “significant amount of time focused on merchandising, including establishing stronger inventory control processes”, resulting in speedy and significant progress.

Wondering how to master the art of a lean inventory and cut costs in your business? Take these three steps:

1. Implement proper demand forecasting

Guesswork and spreadsheets simply won’t cut it if you’re trying to forecast demand in the current retail climate. Trends, shopping habits and supply patterns simply change too fast for antiquated methods to keep up – plus they are notoriously time-consuming and highly error-prone.

Instead, your retail business requires accurate demand forecasting from dedicated software. Inventory Planner by Sage is used by retailers across the globe to reveal the precise quantities of inventory that need to be ordered, along with exactly when they should be ordered to meet demand without accumulating excess stock.

The software used reliable algorithms that factor in historical sales, along with promotions, seasonality and trends. It can even be synced with your marketing for ultimate accuracy.

2. Use analytics to your advantage

To stay one step ahead of trends and ensure your inventory only contains items you can rapidly sell, you need to use data and analytics to your advantage.

Inventory Planner makes that easy by providing access to more than 200 customizable metrics that can be automatically turned into powerful reports your whole team can use and understand.

The impact of this can be huge. As Michael Tomchin, Founder and CEO and sports apparel brand Cycology, says:

“Say you hold $1 million in inventory and, at a very conservative estimate, Inventory Planner improves your inventory ordering and investments by 10% a year (for us, it’s actually higher than 10%). That would result in a saving of $100,000 a year.”

Whether you want granular SKU-by-SKU analysis or top line highlights, Inventory Planner gives you control and visibility over your data so you can make informed decisions that support a lean inventory.

For instance, the overstock report proactively flags up slow-sellers so you can take action before it becomes obsolete and make space for a more optimal inventory mix.

3. Build better supplier relationships

If you want to keep inventory lean and eliminate unnecessary expenses, effective communication with your suppliers is key.

Inventory Planner provides greater visibility of your inventory health and your supply chain, allowing you to spot bottlenecks, inefficiencies and opportunities to improve – as well as assess the performance of suppliers.

By analysing supplier lead times, and more, Inventory Planner can recommend optimal stock levels for each product, ensuring the right stock always arrives at the right time.

What’s more, Inventory Planner’s advanced functionality lets you store and manage supplier information (including contact details, pricing terms, order tracking, lead times and other inventory data) for all your suppliers in one place, making it so much easier to place efficient orders, maintain clear communication and ensure issue resolution.

Inventory Planner’s software can also facilitate collaborative planning between you and your suppliers, enabling joint forecasting, sharing of promotion schedules and synchronized planning efforts.