Management & Finance

12 Ways to Lower Inventory Costs

Offering pre-orders is a good way to test product demand without having to purchase the inventory. This example is from an online fashion marketplace.

Offering pre-orders is a good way to test product demand without having to purchase the inventory. This example is from an online fashion marketplace.

U.S. retailers are reportedly sitting on about $1.43 in inventory for every $1 of sales. Decreasing inventory costs should therefore be a priority for all merchants.

In my experience, there are many options for reducing inventory costs. In this post, I’ll address 12 of them.

12 Ways to Lower Inventory Costs

Reduce stock. It sounds like a no-brainer, but take it seriously.

Retailers know the dilemma. They could spend money on marketing and end up with inadequate stock to fill customer orders. The solution for this is to take pre-orders and specify shipping dates. It will not work on commodity products that everyone sells. But if your product line consists of what everyone else is selling, you’ll likely fail anyway.

Fashion manufacturers, for example, offer pre-orders regularly. Fashion manufacturers design and produce samples, photograph them, and after they receive enough orders, make the product. Look at wholesale fashion sites or online marketplaces. Items often carry disclaimers such as “Pre-order this product to arrive by Aug. 1.” A manufacturer will then cancel all orders if there are too few of them. The public excuse is typically that the product is sold out.

Order directly from manufacturers. If you’ve located products that will likely sell in your store, research low cost, original sources. Track the manufacturer down and order directly from its website. Marketplaces and distributors have small markups that become meaningful on larger quantities.

Don’t be afraid to contact the manufacturer and ask for a discount. You’d be surprised how they are willing to negotiate.

Manufacture on demand. If you control the production of your products, this solution could help. Produce the items only after they are sold. It could work for unique products. (And the more unique your products are, the better your chances to sustain online sales.)

Hunt for wholesale deals. If you don’t control production, build a deeper relationship with existing suppliers and continuously research and develop new ones. Shop for seasonal items during offseason. For example, buy holiday-themed merchandise during or after the holiday for a massive discount.

Negotiate on minimum order. Nothing is set in stone. A manufacturer that requires a minimum order is stating its preference. But in reality, business is sometimes slow. If you take a personal approach, you may could order lower quantities. Just ask.

For example, clothing and accessory manufacturers are experiencing difficulties this year. Many warehouses in the Los Angeles fashion district are full of inventory that they can’t move. They will be happy to sell you at least something.

Ask for free shipping. Research marketplaces to find free shipping offers. If you can’t find those offers, ask the manufacturers. It won’t usually work on heavy and bulky merchandise. But for jewelry, beauty, and accessories, you might receive unexpected shipping deals.

Combine in-house stock and drop shipping. I’m not a fan of drop shipping, for two reasons. First, merchants that offer drop shipping do not control final packaging and shipping. Second, it is risky on low quantities, limited editions, and unique products. You could spend money on marketing, but when the orders come through the products might not be available.

However, mixing drop shipping products with in-house stock can decrease your inventory costs. It’s also a good way to test items without having to buy them.

Eliminate unused warehouse space. I recently met with a former employer in the fashion industry. I toured the company’s facility, which included a recently downsized warehouse. They kept roughly one-fourth of the warehouse, rebuilt it with narrow, higher shelves, and rented out the rest.

Another client who had leased a massive warehouse for five years was shocked when his landlord announced a 20-percent rent increase. He decided to buy a house with a large yard, build storage, and thus pay on his own mortgage instead of someone else’s. And he ended up with lower payments.

Avoid intermediaries. Distributors purchase merchandise from, typically, manufacturers and then resell it. You, too, could purchase directly from the manufacturers.

Order in large quantities. Purchasing in large quantities is risky. It can lower per-item costs. But it’s best for established sellers who know the product demand and have loyal customers. If you are not sure about the demand, buying in large quantities could result in unsold inventory.

Re-evaluate product lines. Typically, 20 percent of products generate about 80 percent of sales. Re-think your inventory mix. Again, unique merchandise produces more profit nowadays because you can control prices and avoid heavy competition.

Eliminate dead stock. Get rid of stock that you’ve held for more than one year. Do closeouts. For low quantities, sell leftovers on apps such as Poshmark, Mercari, Tradesy, and OfferUp. Consider the Facebook marketplace, “de-stash” groups on Facebook, and Craigslist. If you cannot sell, at least donate the products so that you can write off the losses.

Viktoria Kanevsky

Viktoria Kanevsky

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