How to Minimize Inventory Cost

Keeping inventory cost under control is important to the financial well being of any type of business operation. This is especially true when a company is located in a nation that imposes local and national taxes on different types of inventories such as goods in process, supply or raw materials inventories. By keeping inventories as lean as possible without causing problems for production or order fulfillment, a company can manage inventory costs in a manner that avoids tying up financial resources in large inventories that will not move for some time, while also keeping taxes to a minimum.


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    Employ the concepts of aging and usage to the inventory. Aging has to do with how long an item remains in inventory before being issued to a department within the company operation or is sold to a buyer. Usage provides details on how often a given unit is issued and how many units must be kept on hand in order to meet demand. Planning purchases around these 2 factors will help prevent accumulating too many items in an inventory and help keep the total value of that inventory within reason.
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    Discuss order fulfillment with vendors. Getting an idea of how long it takes vendors to fill and deliver an average order makes it easier to set up ordering protocols that ensure you can place an order and still have enough units on hand to keep production going until that order arrives. Along with standard lag time between the submission and delivery of orders, also get some type of commitment on what would be required to expedite an order in the event of an emergency, such as the breakdown of several machines at once.
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    Track changes in usage from 1 period to the next, and adjust the ordering accordingly. While a company may require 4 units of a given item during certain seasons of the year, that usage may reduce to 3 units per month in slower seasons. Adapt orders to reflect this difference, especially if the items in question are expensive.
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    Maintain an accurate inventory at all times. This involves augmenting the use of any inventory database with periodic physical counts of the items in storage and reconciling the database balance with the physical balance. This makes it possible to avoid shortages that could delay the production process and cost the company a lot of money.
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    Process items no longer needed for obsolescence. Most companies have specific procedures for removing old machine parts and other items from an active inventory when they are no longer usable due to replacement of production machinery or similar issues. Accurately processing useless items for obsolescence will lower inventory cost significantly in some cases.


  • Using software programs to track inventory on hand as well as manage ordering and issuing transactions will greatly decrease the chances of errors and make conducting and reconciling a physical inventory much easier.
  • Check with governmental agencies before engaging in the process of requesting obsolescence for a large number of expensive items. Some tax agencies only allow a certain amount of obsolescence in a company's inventory per tax year, which means it may be advantageous to space out the obsolescence over more than 1 annual period.

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Categories: Sales