Holding onto an unnecessary amount of inventory might make you feel prepared for market changes, but often, the opposite is true. When the market changes, businesses often find themselves with a lot of stock that they can no longer use or sell.
In this article, we’re going to help you decide which inventory reduction strategies are best for your business, and how smart technologies and ERP systems can make reducing inventory a breeze.
What Is Inventory Reduction?
In manufacturing and related industries, inventory reduction refers to strategies that help keep the amount of inventory your business holds low. Lower inventory equates to cost reduction, increased efficiency, minimization of waste, and improved cash flow. Those benefits are the reasons why manufacturing businesses implement a variety of strategies to reduce inventory.
9 Inventory Reduction Strategies with ERP Systems
This list of inventory reduction strategies is long because there are many routes to lowered costs. We recommend selecting three strategies that you feel would be easiest to implement in the short term and folding in more as opportunity allows.
1. Demand Planning and Forecasting
Because ERP systems integrate data from all departments, like sales, production, finance, shop floor and more, into one centralized system, demand planning and forecasting is one of the easiest ways to reduce inventory.
Most modern ERP systems use collaborative forecasting from all departments in combination with both historical sales data and advanced forecasting tools to predict how much inventory your business will need based on a milieu of factors.
These factors include data retrieved from your Customer Relationship Management (CRM) software and Supply Chain Management (SCM) system, for example. ERP systems will take into account customer feedback, supply chain constraints, and demand data from previous years.
2. Just-In-Time (JIT) Inventory
Just-In-Time inventory, or JIT inventory, is a strategy that involved receiving goods only as they are needed in the production process, reducing inventory costs and waste. Because ERP systems offer real-time tracking of inventory levels, you can automate your system to order only what is needed, when it is needed.
Of course, the risk to this inventory reduction strategy is when supply chain issues arise. Should a problem occur in the supply chain, you will not be able to cover a gap in availability because you will not have any buffer stock.
3. Supplier Management
Supplier management is exactly what it sounds like. This strategy involved focusing in on your suppliers, evaluating them for dependability, quality of goods, lead times, and responsiveness.
Ideally, you will partner with suppliers that are able to integrate their business systems with yours for real-time visibility, also called Collaborative Planning, Forecasting, and Replenishment (CPFR).
If your suppliers aren’t currently transparent with this data, this can be a relatively easy inventory reduction strategy to implement. Use your SCM system to find alternative partners.
4. Automated Replenishment Systems
An automated replenishment system uses smart technology to reorder products and materials when they reach a specific threshold. Automated replenishment systems ensure that inventory is always maintained at optimal levels, meeting demand while reducing overstock.
Using the automated replenishment system inventory reduction strategy, your team will monitor inventory more accurately by using barcode scanners or RFID technology. Then, the system calculates reorder points for each product, meaning the point at which a new order will be placed before stock runs out. Your system considers lead time, demand, and buffer stock levels. The system then automatically places the order.
The best part of automated replenishment systems is that all the while, the system is collecting and analyzing data. Like all lean manufacturing, the goal is to be continuously optimizing based on current data.
5. Improved Warehouse Management
This inventory reduction strategy is much more hands-on than others, and it will involve a lot of collaboration among your warehouse employees. The goal of improved warehouse management is to use warehouse space more efficiently, improve inventory accuracy, implement cross-docking, and apply lean inventory techniques.
It also means upgrading your inventory and warehouse management systems, whether that be by upgrading your ERP system completely, or simply upgrading your warehouse management system module.
6. Analyzing Product Lifecycle
Product Lifecycle Management (PLM) systems use historical data to reduce waste and improve efficiency. The way to save money with inventory reduction strategies is to attempt to order and use exactly what you need. If you can’t always reach that goal, you always want to make sure unused components can be recycled, if possible.
PLM systems connect with design departments, engineering departments, manufacturing departments, and more to help inform teams what components or materials are easiest to reuse or recycle, which are expensive to store, and which are most costly to dispose of at end-of-life.
Ultimately, analyzing product lifecycle helps reduce waste and the associated costs thereof.
7. Batch Tracking and Expiry Management
Batch tracking and expiry management are particularly vital inventory reduction strategies for manufacturers of perishable items, like pharmaceuticals, foods, and other time-sensitive products.
We recommend using RFID technology to enhance the traceability of products throughout the supply chain. This will help you ensure older stock is used first, adhering to policies like FEFO, or First Expiry First Out, reducing the risk of having to destroy products due to age. It’ll also ensure you stay within regulatory compliance, as many industries have strict regulations.
8. Cross-Function Visibility
Cross-function visibility is a huge component of the effective use of ERP systems. Whether you decide to limit this visibility to only leadership members or open up transparency to your whole company, the data collected by ERP systems can be viewed, analyzed, and used by all departments.
How does this help inventory reduction? As an example, the improved communication of cross-function visibility can allow your procurement team to see sales forecasts from the marketing department. This informs procurement’s purchasing decisions by putting them in alignment with expected demand.
9. Dropshipping
An increasingly popular solution for reducing inventory, drop shipping eliminates the need for storing inventory entirely. This method of reducing inventory isn’t for everyone. In fact, it’s proven to be most popular among retailers. However, that doesn’t mean the dropshipping model might not be beneficial to manufacturers. It can help with JIT inventory reduction or apply to accessories that your business may not need to handle directly.
What Are the Best Inventory Reduction Strategies for You?
The fact is that inventory reduction strategies are not one-size-fits-all, and you can’t implement them all in a day. If you are interested in learning how smart technology and ERP systems can streamline these strategies for you, talk to our experts at Godlan today.
Inventory Reduction Strategies FAQ
Inventory reduction is the process of reducing the amount of inventory help by a company. Inventory reduction helps companies lower costs associated with overstock, warehouse storage, and material waste.
Inventory reduction is important because it saves costs, increases cash flow, improves supply chain and storage efficiency, streamlines customer service, and mitigates the risks of obsolescence, damage, and theft.
