Best Ways to Reduce Inventory Management Costs

Jan 20, 2022 in Management



If you run a business, you know how important it is to keep track of all the products that your business has in stock. The cost of bad inventory management can be very high whereas doing it right can do wonders for your company’s success. Too much stock leads to using up a lot of cash and precious stock room space. Not enough stock, on the other hand, means late delivery, dissatisfied customers, and bad reviews about your service.

While a lot of businesses treat production issues as a top priority, it is only a part of the inventory management process. Finding cost-effective and efficient ways to solve inventory management will automatically help all other aspects of your business, and we are here to help you exactly with that. Let’s look at the best ways to reduce your inventory management costs -

Reducing Inventory Management costs.

There is no one-track solution for reducing inventory management costs. Different methods work for different companies. It’s best to try one solution, examine the results and try to optimize from there. A great way to go about this is to use inventory management software like TranZact, which helps you digitize the whole process, saving you valuable time and effort. Other best practices include -

Reduce Inventory Management Cost.

1. Keeping track of costs.

One of the first things that you need to take care of when optimizing your inventory management is to keep track of all your costs. This includes the amount that your company is spending on purchasing goods that you sell, the amount your company spends on storage for these products, etc. Once you have exact numbers on the amount you are spending, you can have a clearer idea of where you can make cuts and save money. Other costs that you must keep track of include taxes, shrinkage costs, expiration costs, bookkeeping costs, staffing costs, insurance costs, etc.

Inventory carrying costs, which is the amount you spend on keeping an inventory, are usually up to about 20-30 percent of your inventory’s value and have a significant impact on your cash flow.

2. Reducing shipping costs.

One of the discounts that really lure customers to your business is a shipping discount. As incentivizing as free delivery might sound, it means that your business will have to bear the cost of shipping. Another shipping cost you have to take care of is the amount it takes to ship your products to your own warehouse. Since shipping costs make up a significant portion of your expenses, it is worth trying to reduce them as much as possible. Here are a few things you can do to help you with this-

    1. Try to negotiate with your shipping company for a bulk discount or lower rates.
    1. Save expenses on packaging by using cheaper packaging products. The size and weight of your products also affect the shipping cost, so you might wanna avoid any oversized boxes or unnecessary packaging waste.
    1. When shipping to your warehouse, negotiate shipping discounts.
    1. It might also be worthwhile to find manufacturers and vendors that offer shipping discounts.

3. Reducing Overstock inventory.

A lot of businesses are in the habit of overstocking their inventory in the name of “emergency stock”. This can cost your business in multiple ways -

    1. Excess inventory takes up storage space and adds to storage costs.
    1. The purchasing costs of items that might not sell is also a significant expense.
    1. If the extra products expire before you are able to sell them, you have to bear the cost of spoilage.

Instead of relying on an emergency stock, you can try a just-in-time inventory management approach. This approach includes receiving your products as close to the delivery date as possible. You’ll need to find vendors and suppliers that have as short a lead time as possible. In case you are already suffering from an overstocked inventory, there are a few ways out of it -

    1. Try returning the products to your vendor in exchange for a refund or credit.
    1. Sell the products at a discount rate. This will affect your profit projections but save you from a loss. This will also help you save storage costs and spoilage costs if the products are near expiration.

Read more about - What is the Significance of Accurate Inventory Levels?.

4. Optimizing the Order Management Process.

Order management is the backbone of a business, and optimizing order management can help you reduce inventory costs significantly. It will make keeping track of canceled orders easier, along with helping you avoid overstocking. An efficient Order management system will help you decide the best time to order more products in order to avoid both understocking and overstocking.

Using software that will automate your order management process is one of the most efficient ways to go about this. When your stock goes below a specific amount, the software will automatically replenish your inventory. It will also help you get a clearer picture of the expenses of the goods you are selling, which in turn helps you decide which products you want to continue with.

Read more about - Order Management- 3 Biggest Challenges SMEs faces.

5. Using Data to make better decisions.

Finally, a good practice to keep your inventory costs low is to take the help of statistics and sales figures. While sales differ from one year to another, the data can help you make informed decisions about which products are selling well and the ones that are not. Data can also help with other insights such as information about a specific product and whether it costs less at a particular time of the year, etc.

In the End

We hope these tips help you in reducing your inventory management costs. At the end of the day trying different approaches and seeing how they work for your particular business is how you will truly optimize your inventory management. Software like TranZact, which is a zero-effort digital transformation tool that digitizes your entire business process can help you with that greatly. Looking for more interesting inventory management tips, find them here.


TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.