Inventory reduction is one of the most misunderstood and mismanaged strategies in inventory management. When executed correctly, though, running leaner can significantly cut costs while reducing stockouts and spoilage of fresh products.
The catch? Far too many businesses fall into the same pitfalls when they attempt to streamline their inventory. Inventory planning that doesn’t rely on excess stock enables the agility needed to keep up with dynamic — sometimes volatile — customer demand.
To best reap the benefits of inventory reduction, it’s crucial to understand how to make inventory management efficient and recognize common blunders so you can avoid them.
What is inventory reduction?
Inventory reduction involves decreasing stock by minimizing product variety or reducing existing product units.
So why doesn’t everyone succeed when they try to run leaner?
While simply keeping less inventory is technically reducing inventory, that isn’t enough for efficient inventory reduction. To optimize your inventory management strategy through reduction, you’ll need to make use of AI and machine learning to automate rather than relying on manual processes. It’s also critical you adopt a dynamic approach that continuously evolves, keeping pace with changing market preferences. This will help you align your inventory management strategies with current demands, ensuring you maintain optimal stock levels.
With more accurate inventory planning, shrinking your inventory allows you to operate with more flexibility while decreasing stockout and reducing lead times. To succeed where so many others have failed, make sure you avoid the five most common inventory reduction mistakes.
The 5 most common inventory reduction mistakes
Navigating the complex world of inventory management, businesses often encounter pitfalls that can quietly erode their bottom line. Here are the five most common inventory reduction mistakes that, if not addressed, can turn into a costly misadventure.
1. Overreliance on demand forecasting
While demand forecasting is crucial for inventory management, relying solely on forecasts can lead to overstocking or stockouts.
Businesses should diversify their strategies instead of treating forecasting as the sole determinant of inventory levels. Techniques like Just-In-Time (JIT) delivery or Vendor Managed Inventory (VMI) offer flexibility and resilience in inventory management, ensuring optimal stock levels align with actual demand.
With JIT delivery, a retailer receives goods only as needed, boosting efficiency and cutting costs. JIT requires accurate demand forecasting and reliable suppliers to avoid disruptions. To succeed with this approach requires precise coordination and timing of orders, production schedules, and delivery systems to ensure that materials and products arrive precisely when needed, minimizing the need to hold large amounts of inventory.
With VMI, the supplier (vendor) manages the inventory levels of their products at the retailer’s premises. The vendor monitors the stock and decides when to replenish products and in what quantities, often based on agreed-upon inventory levels, sales data, and forecasted demand.
Nomeco illustrates the power of an optimized VMI system. The pharmaceutical supplier replaced their old legacy systems with a VMI strategy that includes automated inventory management replenishment processes. Their new, streamlined approach significantly reduced manual interventions and enhanced the efficiency of pharmaceutical distribution for approximately 350 pharmacies across Denmark and the Faerio Islands.
2. Ignoring shelf life considerations
Too many inventory strategies forget that fresh food inventory management needs an approach that accounts for shelf life. A basketball and a head of lettuce may be the same shape, but their shelf lives are drastically different, so inventory strategies need to account for those differences. If you forget to factor in shelf life with your inventory reduction strategy, you’ll see higher rates of spoilage, waste, and financial loss. However, these issues can be prevented with a few strategic adjustments.
FIFO (First-In, First-Out) is an inventory management tactic where items stocked first are sold or used first. It is an effective way to minimize the risk of selling expired or near-expired goods and maintain the perishable inventory’s overall quality. A systematic approach to inventory management is required to implement FIFO successfully, including proper labeling, storage, and tracking systems.
Negotiating with suppliers to arrange smaller, more frequent deliveries can significantly enhance inventory freshness. Aim for smaller orders of fresh products for greater flexibility in inventory management.
Embrace advanced inventory management tools that provide real-time visibility into stock levels and product shelf life. A good inventory management system can monitor critical metrics, identify trends, and adjust ordering and sales strategies accordingly. For example, if certain products are approaching their expiration dates faster than anticipated, managers can promptly initiate promotions or discounts to accelerate sales, minimizing spoilage.
A good inventory management system can monitor critical metrics, identify trends, and adjust ordering and sales strategies accordingly.
Continuous monitoring and trend analysis of inventory data are both essential for refining inventory reduction strategies. This includes tracking the success of FIFO implementation, assessing the impact of delivery frequency adjustments, and evaluating the effectiveness of promotional activities aimed at moving older stock. By constantly monitoring these factors, you will identify areas that could be improved, adapt to changing market conditions, and optimize inventory management practices to improve financial and environmental results.
3. Rigid safety stock policies
Static safety stock policies fail to account for dynamic market conditions, leading to inefficiencies such as unnecessary inventory costs and missed opportunities for optimization. Relying on unchanging inventory levels does not effectively buffer against the uncertainties businesses face.
That’s why it’s so important to integrate lean inventory management practices into your operational strategy; they enable retailers to reduce excess inventory and holding costs while improving overall efficiency. It’s a strategic move that positions your inventory to work harder for your success.
But don’t fall for the myth that running lean will result in stockouts. Setting appropriate safety stock levels based on accurate demand forecasts allows you to buffer against unexpected demand fluctuations and supply chain disruptions without the excess stock. This approach consistently fulfills customer demand while skipping the drawbacks of carrying excessive inventory.
And it can help you adapt to changing customer expectations.
4. Neglecting sustainability goals
Reducing your stock in a way that’s also good for the planet isn’t just a nice thing; it’s crucial for your business’s future. Increasing environmental regulations require more businesses to report on their emissions each year and consumers are eager to see companies reduce their carbon footprint. A coalition of nearly 200 companies (including the six largest food retailers in the world) are aiming to cut their food waste in half by 2030.
Sustainability will only become more important as the next few years unfold. It’s not a trend; it’s how we build a sustainable future. Companies that take steps now to track and reduce emissions can stay ahead of the competition and meet the growing expectations of both regulations and consumers.
Thankfully, increasing your sustainable practices doesn’t have to be a huge extra effort or expense.
Regularly checking your environmental targets will help you stay ahead of new green standards and continually improve your processes for better sustainability. To make sure you know what targets are reasonable and to accurately gauge your impact, take advantage of tools that make the latest data available to users. Leveraging technology for sustainable inventory management can provide real-time data for optimizing stock levels and improving demand forecasting, further contributing to environmental preservation while achieving operational efficiency.
Regularly checking your environmental targets will help you stay ahead of new green standards and continually improve your processes for better sustainability.
Set measurable sustainability goals to reduce waste, CO2 emissions, and costs. Rethinking distribution practices, such as optimizing transportation routes, is also crucial in minimizing your brand’s environmental footprint.
Integrating sustainability into inventory management enhances a brand’s reputation and competitiveness, as consumers increasingly favor businesses committed to environmental stewardship.
5. Static inventory strategies
Committing to more sustainable operations is one example of how keeping your inventory approach agile is vital to keeping up with your customers. The dynamic nature of consumer demand and unpredictable supply chain challenges necessitate a more agile and adaptive approach to inventory management.
The proliferation of artificial intelligence (AI) in retail has revolutionized inventory management. These technologies enable businesses to analyze vast amounts of data quickly and accurately, providing previously unattainable insights. AI-driven demand forecasting, for example, can predict future sales accurately, allowing companies to proactively adjust their inventory levels. This level of transparency is crucial for maintaining operational flexibility, as it allows brands to adapt their inventory strategies on the fly and minimize the impact of unforeseen events.
Moving from static inventory strategies to a dynamic, technology-driven approach reduces costs and enhances customer service, giving you a competitive edge.
How Swedish retailer ICA mastered running lean
ICA, Sweden’s biggest retailer, is an excellent example of a brand staying flexible. With a network of five distribution centers and over 1,300 stores, ICA needed a better way to manage their inventory.
They’ve improved inventory management with RELEX by adopting AI-driven planning solutions. ICA’s independently owned and operated stores can now adapt their offerings to local demand while managing costs.
Since the introduction of advanced forecasting and replenishment techniques in 2017, ICA has seen significant advancements in the sophistication of their supply chain management. A focused initiative improved forecast accuracy by 6.69 percentage points and enabled dynamic safety stock adjustments, improving their ability to handle seasonal variations and demand peaks like holidays. These efforts have reduced inventory levels, with safety stock levels seeing a 32% reduction, freeing up resources for strategic business investments.
A focused initiative improved forecast accuracy by 6.69 percentage points and enabled dynamic safety stock adjustments.
With one shift in their inventory reduction approach, ICA improved demand forecast accuracy, optimized their distribution network, reduced operational costs, and cut back on spoilage while strengthening the brand’s position in the grocery retail market.
The power of end-to-end inventory management
An end-to-end, integrated system is critical for successful inventory reduction. It provides seamless data flow and coordination across the supply chain, enabling accurate demand forecasting and efficient stock management. Integrated inventory planning can minimize manual errors, cuts operational costs, and aligns inventory levels with real demand, ultimately enhancing overall supply chain agility and customer satisfaction.
