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How to Optimize Inventory: 7 Proven Inventory Reduction Strategies

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Sanjay Negi

Assistant Director @ Shiprocket

April 11, 2023

5 min read

Optimize Inventory

The Indian eCommerce market has grown exponentially recently, especially during the COVID-19 outbreak. Stringent lockdowns and safety precautions have fueled the trend of online shopping. Due to recent developments, the Indian eCommerce market is projected to reach $ 214 billion by the end of 2027, says a CII Shiprocket report.

However, due to growing customer demands, businesses must keep their inventory updated and use specific tactics that can help them optimize their inventory. So what are these strategies, and how can a business’s inventory reduction strategies improve its profitability? 

Nevertheless, Before looking into inventory reduction strategies to optimize inventory, it is essential to understand what inventory reduction means. Let’s find out.

Inventory Reduction: The Definition

As the name suggests, inventory reduction means reducing the inventory to cater to the growing customer demands. However, it is essential to understand that it isn’t just moving the excess goods from one warehouse to another; instead, it means preventing surplus goods from accumulating in the storage units in the first place while simultaneously optimizing the inventory for better-selling SKUs.

How to Optimize Inventory with Inventory Reduction Strategies?

Since the definition of inventory reduction is clear, let’s have a look at some strategies that can help businesses to optimize inventory in a better way.

Use Vendor Managed Inventory (VMI)

A vendor-managed inventory, or VMI, allows businesses to share the responsibility of inventory optimization and management with the vendor itself. To do so, the business must share product needs and sales information with the vendor, who can then dispatch the optimal amount of products and goods per the demand.

Audit Existing Relationships with Supplier

VMI is one way to optimize inventory, but it is not the only one. Another strategy a business can opt for is auditing its relationship with the supplier to ensure that the demand and supply cycle runs smoothly. 

A business can audit the relationship by analyzing the communication line and rate of product deliveries. Auditing can also be more impactful if a company uses its KPIs for its most important suppliers. For instance, KPIs for products delivered, whether they were delivered on time, they were able to meet the client’s expectations. As a result of this audit, companies can improve their business-supplier relationship, further helping them to free up their capital and reduce inventory costs.

Conduct FSN Analysis

FSN or ‘fast-slow-non moving’ product analysis is one of the best strategies to optimize inventory. Under this tactic, companies must categorize their inventory into three groups: fast-moving, slow-moving, and non-moving. 

Fast-moving Products

The products that typically have rapid turnover are called fast-moving items.

Slow-moving Products

The items that usually take longer to sell are categorized as slow-moving products.

Non-moving Products

The items demanded short in a given analysis time frame are non-moving products.

Once the business has classified products into these three categories, it can quickly identify issues and concerns around consumption, usage and quantity held in storage. This can also help in configuring the warehouse to ensure the effective storing of all three types of products.

Related Article: 7 Strategies for B2B Logistics to Reduce Freight Cost

Dropship Some of the Products

Dropshipping is a practice where a business accepts the order but does not keep the stock; instead, it sends it directly to a supplier or manufacturers, who then deliver it to the end customer. This process can significantly reduce inventory management costs and optimize inventory, as the business doesn’t have to maintain the stock to cater to the customer.

Set Reorder Points for Frequently Purchased Items

Businesses need to identify which products in their stocks are purchased frequently to optimize inventory. Once the company has identified these items, it can set a reorder point. This is an arbitrary level of inventory which can alter the stakeholders to reorder a particular SKU. Owing to this, businesses can seamlessly optimize their inventory.

The formula to identify reorder point:

Reorder point = Average daily usage x Average lead time in days + Safety stock.

Identify Economic Order Quantity

Another smart strategy a business can opt to optimize inventory is calculating Economic Order Quantity or EQU for the frequently purchased items. This allows the businesses to know the most cost-efficient number of units to be ordered so that their holdings and transportation cost are balanced. Notably, while calculating EQU, businesses assume that the demands are steady for a given time frame. To calculate the EQU, businesses must consider the values of demand in units per year (D), order cost per purchase order (S), and cost of holding the items per unit per year (H).

The formula to calculate EQU: √(2DS/H)

The calculation will help businesses to ensure they can optimize inventory while meeting customer demands.

Use a 3PL Service Provider

Working with a 3PL service provider such as Shiprocket Cargo can significantly help businesses to reduce their inventory cost. This is because 3PL players have multiple fulfilment centers, which businesses can use to store their inventory. 

While working with a 3PL, the service provider receives inventory and orders as they are made at the point of sale. The notifications can be sent manually or by an automated notification system, after which the 3PL team initiates the products’ picking, packaging, and delivery. Although the businesses have to pay the 3PL service providers upfront, the cost is much lesser when compared to the recurring cost of inventory management.

Conclusion

Inventory management is a complex and cost extensive process which can disrupt the profit of a business. However, implementing the above-mentioned inventory reduction strategies, such as working with a 3PL company, conducting FSN analysis, using the dropship method, and using vendor managed inventory, can help businesses reduce their inventory costs and optimize inventory.

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