Key Highlights
Check out these four strategies to better control your inventory costs:
- Outsource Freight Management: Small business owners can save time and money on inventory management by working with logistics companies or freight brokers for shipping, instead of managing it yourself. These experts can leverage software to find the best shipping rates and provide advice on consolidating shipments and timing.
- Invest in Inventory Management Technology: Using upgraded inventory management systems and hardware are worth the initial investment because they can help save you money in the long run. Modern systems are often enhanced with AI capabilities and can provide real-time inventory tracking, automate reordering and integrate with freight services. All of these capabilities can help increase inventory control and save money.
- Cut Non-Profitable Product Lines: It’s important to evaluate your product lines and offerings to see if there’s anything you can discontinue. Gene recommends using the 80/20 rule for inventory, suggesting that businesses should discontinue product lines that don’t contribute a significant amount of profit. This can help free up resources to focus on the more profitable items and reduce your overall inventory costs.
- Eliminate Obsolete Inventory: Business owners should plan to regularly review their inventory and remove any obsolete inventory. Obsolete inventory is not only taking up valuable space but also costing you money. Gene recommends writing off this inventory as a tax deduction because it’s a loss. Plus, clearing it out will help free up space for your faster-selling products.
Transcript
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Gene (00:02):
Hey everybody, it’s Gene Marks, and welcome to another episode of The Hartford’s Small Biz Ahead Podcast. This is actually part two of our two part series on controlling costs. Last time I spoke to you about controlling healthcare costs. This time I’m going to be talking about some strategies and ideas for you on controlling your inventory costs. Now, why am I talking about controlling costs? Well, that’s because recently the National Federation of Independent Businesses, the NFIB, came out with a survey. They surveyed about 3000 business owners asking them what some of the biggest issues are that they are facing this year. And the usual suspects are there. Of course, I mean, there’s finding labor and government and political and economic uncertainty and taxes, interest rates, cost of capital. But the number one and two issues facing business owners, particularly small business owners, are number one, healthcare costs.
Gene (00:59):
And number two, cost of inventory. So, again, in the last episode I did, I covered healthcare costs and offered some strategies and thoughts on controlling them. This time, let’s focus on inventory. Now, look, you probably have inventory if you sell online, if you have an e-commerce business, maybe you’re an Amazon merchant, or a Etsy seller, you’ve got inventory. If you are selling B2B, if you’re a distributor, if you’re a manufacturer, if you’re in retail, if you’re running a restaurant, you’ve got inventory. These are all issues that impact businesses of those types. And inventory is probably amongst your biggest cost of your business. It’s also the most important because the better margin that you get on your inventory, the better you are to cover your overhead and the more profits that you can make. So inventory is a big issue, and obviously over the past few years, the cost of so many materials have skyrocketed.
Gene (01:52):
Some of them do, due to inflation, supply chain issues, all sorts of things like that. So the question is like, how do you keep these under control? And I’ve got some thoughts on how to do this. Okay, so I’ve actually got four strategies for you. Let’s start with strategy number one, and then it has to do with freight. The cost of freight has been extremely volatile over the past couple of years. Inventory, freight, international, has actually dropped quite a lot over the past year, which is good news. But domestically, freight costs are up close to 20%. So it’s a big, big issue. My recommendation to you if you are shipping any items is not to do it yourself, but to use an outside expert, go to a logistics company, a freight forwarder, or a freight broker, you can Google these people that are either local or not local to you. It really doesn’t matter. But you want to work with an outsider. Why? Because if you work with a good logistics company or a good freight broker, they have access to good software, really good software that can find the best prices for your shipments. All around the world, depending on when you are shipping your items, they have access to way more data than you ever could independently.
Gene (02:58):
Number two, if you work with a good freight forwarder, they will make recommendations to you. Things like consolidating shipments on a certain time or when it’s best to ship freight as well. Your best time of year or best days are looking ahead to when activity is where you can get the best prices. A good logistics company will give you that kind of consulting advice. When you save on freight, you save on the cost of your inventory, you increase your margins, you increase your profits. So, number one thing I want you to do is make sure that you are talking to an outside expert in freight. Number two has to do, and you’re not going to like this one, but it, it’s necessity your technology. You need to upgrade your inventory management software and hardware.
Gene (03:48):
Now it’s a cost. You might need to get financing for this cost. You might need to take that money out of reserves to pay for this cost. But I’m telling you right now, you need to incur this cost. You need to make this investment. Why? Because inventory management software has gotten so different over the past few years. It has taken leaps and bounds over to where it was just 5, 6, 7 years ago. Nowadays, inventory management software works with hardware so that you can barcode or put in radio frequency ID tags so you can get an instant, instant look at what your inventory is. Good inventory management software now are coming out with new iterations that are leveraging AI. They’re analyzing the products that you’re selling. They’re analyzing when you’re selling it. They’re automatically placing orders when demand get, when supply of certain products get low, and they tell you in advance when you’re going to need to be ordering more.
Gene (04:45):
Good inventory management software this year also integrates with these freight brokers and logistics companies so that they can see the kinds of products that you have in selling, and you can actually get alerted or have autonomous actions for making orders based on when the best freight prices are available too. Inventory management software has gotten much, much better at tracking costs as well. So you can truly know the cost of not only your materials, but your labor and your overhead. Now guys, this takes work. Putting in an inventory management system is not only expensive to buy, but it’s expensive to implement. You’ve got to have somebody internally who really gets their arms around it and does the right way. There’s migration and data issues, there’s customization, there’s integration issues, all sorts of stuff like that. But I got to tell you, my clients that have invested in inventory management software and position themselves with good companies, they are squeezing every penny out of their inventory because of the technology they’ve invested in. You want to make sure that you are doing the same. Invest in in inventory management software, which brings me to number three, and that has to do with cutting product lines. We have the 80/20 rule applies like everywhere, including inventory.
Gene (05:57):
Most likely, according to numerous studies that have been conducted over the past few years, 80% of your profits are probably coming from 20% of your inventory . So, it’s true, you need to do something about this, and quite possibly you might need to cut inventory lines or products that you are selling. This is not an easy thing to do. People get emotional and romantic about some of the things that they sell, but it is good business. Now, if you, what you should be doing is running reports or at least gathering the data, what inventory items are selling the best and what inventory items are selling the not so best. The ones that are not turning over very much are costing you. It’s not just the cost of the inventory, but every day they’re on your shelf, they’re absorbing overhead and shelf space, and they’re taking away space from more profitable inventory that you could be putting in its place.
Gene (06:49):
So, the smartest clients I know are listening to this and they’re doing something about it. They’re getting rid of their inventory that’s not turning over very fast, and they’re replacing it with more profitable items. They might be outsourcing those inventory items to somebody else. They’re making less profits on it, but they still have them available for customers who need them. Just be careful. You might have an inventory product line that your biggest customer loves, even though they’re only buying it once a year, and maybe discontinuing it is not the greatest thing ever. But my advice to you is to go through your inventory with a fine comb and find those items that are not turning over and stop selling them. It will benefit and it will lower your costs significantly. Finally, there’s obsolete inventory. Now, obsolete inventory is not that, they’re just not turning over that fast.
Gene (07:36):
It’s like they’re not turning over at all, and I know you’ve got it. I know you’ve got inventory that’s been sitting around and sticking around for the past four or five years. You probably bought inventory, like you got stumbled on it somewhere, saw it at a fair, went to an auction, bought it from another business that was going out of business, and you thought, Hey, this is awesome. This stuff, I’m going to sell it for 10 times what I bought it for, and it’s still sitting there on your shop floor. What do you do about that? It’s costing you overhead when it’s doing that. It is collecting dust, it is taking up space, it’s taking away space from items that you could be selling more of just like inventory that’s moving not so fast and it’s obsolete. What, what, what, what’s the story there?
Gene (08:17):
Plus, it’s costing you from a tax perspective as well. If you write off this obsolete inventory, if you go and you, you actually dispose of it, assuming you’re still carrying it on your books, you can take a tax deduction for it when you write it off your books. So, get rid of it, free up that extra space. Make it available for those good turning higher profitable items as well. Every two, three months, you should be walking around your floor and be very, very brutal in your decisions about what’s obsolete or not, and getting rid of that stuff that’s just not turning over. I mean, anything that’s been sitting there for six months or more probably shouldn’t be sitting there.
Gene (08:54):
So make sure that you do that as well. Those are four strategies for, for dealing with your inventory. Again, just to recap, outsource your freight to a logistics firm or a freight broker. Very, very important to work with somebody that does that. Number two, invest in technology this year. It’s expensive, but put in a bar coding system and an RFID, that’s radio frequency ID system. Go through the paint of migration, the integration, the customization, get it working because I am telling you, the better inventory systems that are out there that are, are the, some of these software broker, vendors are leveraging AI in such a way that they can do things automatically for you. They can forecast demand for you. They can really get you a better control over your inventory so you’re not carrying too much. Number three, cut product lines that aren’t selling.
Gene (09:45):
Make those hard decisions because I’m telling you, I’m betting 80% of your profits are generated from 20% of your inventory. And finally, when you have altogether obsolete inventory, stuff that hasn’t sold it all in six months, get rid of it. Write it off your books. Take the tax deduction, clear up the space, make a space available for inventory items that are selling and turning over that much better. That’s what you want to make sure that you are, that you are doing. My name is Gene Marks. If you have been listening to The Hartford’s Small Biz Ahead podcast, this was part two of our two-part series on controlling costs. Listen to our last one on controlling healthcare costs as well. If you need any other tips or advice or help in running your business, please visit us smallbizahead.com. Thanks so much for listening. We’ll be back to you next week with some more tips and advice to help you run your business. Take care.
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