The business would establish an allowance account that is credited with an estimated amount of expected losses. To record inventory loss, the business must credit its inventory account with the value of the written-off inventory to reduce the balance. Then, the loss on the inventory write-off expense account will be increased with a debit to balance. Understanding inventory write-offs is essential when goods become lost, damaged, stolen, or otherwise devalued.

• Since your customers aren’t getting their orders on time, it could lead to dissatisfaction that will leave a negative brand impression.
• Don’t bury your head in the sand just because this is an uncomfortable topic.
• It also helps you avoid the pitfalls of understocking, such as lost sales and customer dissatisfaction.
• It optimizes the inventory system, such as demand forecasting, inventory reduction, etc, which can enhance the inventory quality and efficiency.
• The decisions team members make to deal with these uncertainties can undermine your ability to reduce inventory costs.
• Without it, very few types of automation or optimisation are possible – or at least they’re unreliable.
• It can also enhance the overall customer experience and satisfaction, which could increase sales and word-of-mouth referrals.

If you’re constantly experiencing issues with excess inventory because of too much safety stock, switching to a just-in-time inventory model could effectively help you reduce costs. This essentially means ordering just enough stock to meet customer demand and quickly replenishing inventory as it runs out. As such, you can create a lean supply chain and minimize the risk of excess inventory. Dropshipping is a business model where the business does not keep any inventory at all, but instead transfers the customer orders and shipment details to a third-party supplier. It eliminates your inventory holding costs because you no longer need to store, transport, or handle any inventory. With no inventory in stock, you will no longer have any of the risks that come with holding inventory, such as damage, theft, or obsolescence.

Orchestration and automation for your entire supply chain.

Per Pareto Principle, 80% of the outcomes are based on 20% of the inputs. Well, if you’re like most ecommerce brands, 20% of your product catalog will be responsible for 80% of your sales. These companies transfer inventory from one carrier to another during transportation, with minimal to zero warehousing or material handling. Gartner recommends considering six factors to determine your supplier network’s level of resilience, including risk appetite, identifying critical partners, and balancing trade-off decisions. In the ideal world, you’d establish a long-lasting, loyal relationship with a single supplier. One way is to build a diverse supplier network that makes your brand more resilient.

Increased flexibility

This is the main principle of the ABC Analysis in Inventory Management. It is about classifying the few items that will make the most of your business (A products), and the many items that make a small part of your business (C products). Using those two KPIs – Service Rate and Inventory Turnover – gives good visibility of inventory and service levels.

What are the key benefits of automating replenishment processes?

Let’s look at some of the methods used in strategic supplier management. Possibly the most important one would be to select the right suppliers. These need to be suppliers who can meet all your business requirements, goals, and expectations, and whose business values align with yours. You can negotiate the best terms and conditions with your suppliers as far as price, delivery, payment, and quality are concerned.

Batch tracking for inventory accuracy

Since the issue seems to persist, you can’t blame a single instance for the cause. You decide to switch your entire operation to a just in time inventory (JIT) model. First, let’s say you’re a food wholesaler who currently has a large backlog of perishable food. Your demand forecast was incorrect and customers aren’t purchasing in the quantities you expected. You choose to run a promotion on an online marketplace featuring those products to try to sell them before expiration. All you have to do is calculate a good discount and send out some eCommerce email marketing messages to entice customers and increase eCommerce sales.

• Another way it can improve inventory management is by making your inventory system more adaptable and scalable, thus supporting the growth of your business.
• Accurate demand forecasting can prevent over-ordering so that inventory does not accumulate and become obsolete.
• Inventory shrinkage is when actual inventory levels are less than accounting has them recorded as.
• With Warehouse 15, workers get real-time updates on order status, minimizing delays and ensuring that the correct items are picked, packed, and shipped every time.
• It enables businesses to respond quickly to fluctuations in demand without manual intervention.
• For example, even if stock if running low, you won’t necessarily need to create another purchase order if you see there’s more inventory coming in soon.
• This can reduce delivery times by getting closer to customers and optimize outbound transport in some cases.

The Challenges in Reducing Inventory

In order to comply with generally accepted accounting principles (GAAP), businesses must follow the inventory write-down process in their bookkeeping when their inventory’s value is reduced. So, if we return to the example of the red scarves, you would write down their value if they become much less popular, but can still be sold. The accurate value reduce inventory loss of inventory is crucial in calculating gross profit or loss. This is why it’s important for businesses to account for inventory write-offs when the value of inventory changes significantly.

Informed by your demand forecasts and real per-SKU-per-store sales-thru rates, the automated orders that advanced analytics enables will get you closer to that textbook just-in-time inventory. An accurate demand forecast can open up many new strategies for lowering your inventory costs. The primary reason retailers carry excess inventory is that they do not accurately estimate customers’ true demand for their products. Approaching inventory reduction with this mindset will reduce your inventory costs and will improve KPIs.

In other words, these inventory metrics will help you understand how to reduce your order size based on which SKUs are taking longer to sell. Additionally, even for faster-selling SKUs, you’d be able to adjust your order size by balancing it with the frequency of your reorders to keep up with consumer demand. Moreover, storing too much inventory can easily overwhelm your warehouse. You may technically have the space, but it might get much more complex to manage all that inventory. You could be shelling out more resources and workforce to help you track and manage your excess inventory. Plus, it could easily throw your warehouse organization into a loop, which could affect other operational activities.

Organizations can also rework their inventory stock holding policies to ensure the majority of strategic safety stock is held centrally while maintaining high levels of service in the network. Explore effective inventory management strategies to streamline operations, optimize stock levels, and enhance your business performance. By consistently monitoring inventory KPIs, businesses can minimize losses, improve stock accuracy, and enhance supply chain management, ensuring smooth operations and satisfied customers. There are many inventory reduction methods supply chain management teams can use to deliver cost savings – but there’s no silver bullet. Simply reducing the stock levels of all product lines is not the answer.