In this article, we cover what inventory waste is and its common causes. We also share our process for reducing inventory waste in 7 simple steps. Read on to learn more.
Inventory waste refers to any unnecessary costs or losses associated with storing, maintaining, or managing unsold goods or materials. Essentially, it signifies inefficiencies within the inventory process that lead to financial losses or increased operational costs for businesses.
Example: For instance, a clothing retailer who overstocks by purchasing 5,000 units of a particular style of jackets at $50 each may find themselves with 3,000 unsold units at the end of the season. If they are forced to discount these jackets to half-price, they potentially lose $75,000 in revenue, and that's before factoring in the added storage and management costs which illustrates inventory waste.
Here are some of the common causes of inventory waste:
Incorrect predictions regarding demand can lead to overstocking or stock-outs.
Example: A toy company, anticipating a massive demand for a new action figure, manufactures 200,000 units, but only manages to sell 50,000 due to shifts in trends, leaving them with a significant surplus.
Manufacturing more products than required, often in anticipation of potential future demand.
Example: A smartphone manufacturer produces 1 million units of their latest model, expecting it to be a hit. However, only 600,000 units sell in the first year, leaving them with a vast amount of unsold stock.
Delays or inconsistencies in the supply chain can cause organizations to hold more stock as a buffer.
Example: A fashion brand, facing inconsistent fabric deliveries from its suppliers, decides to stock up on extra materials which leads to increased storage costs and eventual waste when some fabrics become outdated.
Insufficient communication between sales, production, and procurement can lead to misaligned inventory levels.
Example: The sales team of a company launches a promotion without informing the production department. This results in a sudden spike in demand that production cannot meet which leads to stock-outs and missed sales opportunities.
Extended periods between order placement and delivery can push companies to maintain higher stock levels.
Example: A furniture store, that imports exclusive designs from abroad with a lead time of 3 months, overstocks items to prevent stock-outs but ends up with unsold units from previous seasons.
Outdated or inefficient systems can result in poor stock visibility and management.
Example: A bookstore that uses an old inventory management system fails to recognize they have over 100 unsold copies of a specific title in their warehouse, leading to over-ordering and wasted storage space.
Buying in bulk to leverage discounts can lead to excess stock.
Example: A restaurant orders 500 pounds of potatoes at a discounted rate but can only utilize 300 pounds before they start to spoil which leads to wastage and negating any initial savings.
Offering a wide variety of products without adequate demand can lead to excess inventory for slow-moving items.
Example: An electronics store offers 15 different types of earphones, but customers mainly purchase only 3 popular models. The remaining 12 models occupy shelf space which only gathers dust and ties up capital.
Use our 7-step Inventory waste reduction process to effectively manage your inventory. Simply follow the steps below:
Utilize advanced analytics and tools like Tableau to dive deep into demand patterns. This precise demand prediction helps streamline procurement and production processes.
Example: A local shoe store uses Tableau to analyze sales data from the past year, identifying trends that suggest sandals will be more in demand next summer. Armed with this information, they adjust their procurement strategy, ensuring they don't overstock on winter boots.
Adopt the Just-In-Time (JIT) approach to ensure goods are produced or ordered only when needed. This practice aligns production with current demand to reduce the risk of excess stock.
Example: A bakery starts using the JIT approach, baking bread based on daily orders and a small buffer for walk-in customers. This reduces the instances of leftover unsold bread at the end of the day.
Forge strong partnerships with suppliers to expedite the entire order-to-delivery process. By reducing this lead time, businesses can diminish the need for expansive buffer stocks.
Example: After facing several stock-out situations, an electronics store works directly with its suppliers to develop a faster, more reliable delivery schedule. This new partnership means they no longer need to order products months in advance and it reduces their on-hand inventory costs.
Make it a routine to periodically evaluate your inventory. By doing so, you can identify and liquidate obsolete or slow-moving items to prevent storage waste.
Example: A bookshop conducts monthly reviews of its stock and realizes certain titles haven't sold in over a year. They decide to offer these books at a discount to clear shelf space for newer, more popular titles.
Efficient warehouse organization is key to preventing product damages. By optimizing storage practices, businesses can both safeguard their products and accelerate inventory turnover.
Example: A clothing retailer redesigns its warehouse layout to group items seasonally and using vertical storage solutions. This not only reduces the time taken to locate items but also ensures delicate garments aren't crushed or damaged.
Modern challenges require modern solutions. By deploying up-to-date inventory management software, businesses gain access to real-time tracking, insightful analytics, and predictive tools that enhance efficiency.
Example: A hardware store switches from a manual tracking system to a modern inventory management software. This change enables them to get real-time updates on stock levels, alerts for reordering, and even predictions based on past sales to ensure they always have what customers want without overstocking.
Promote open channels of communication among the sales, procurement, and production teams. Coupled with nurturing robust supplier relationships, this ensures timely deliveries and reduced product defects.
Example: A car manufacturer establishes weekly meetings between the sales, production, and procurement teams. In one of these meetings, the sales team alerts the others about a major upcoming promotional event which allows production to ramp up in anticipation and procurement to negotiate timely deliveries with suppliers.
Galactic Brews is a craft beer brewery located in Portland, Oregon, known for its innovative and unique beer flavors inspired by celestial events. Their beers are not only loved locally but are also gaining traction in neighboring states. However, due to inefficiencies in their inventory processes, they've noticed an increase in operational costs. To reduce their inventory waste, Galactic Brews applied our 7-step process for reducing inventory waste. Here’s how they implemented it:
Using Tableau, Galactic Brews analyzed their sales data from various seasonal events and found that their "Lunar Lager" peaks in sales during full moon nights. With this insight, they adjusted their brewing schedule to match this predictable rise in demand.
Instead of brewing large batches of every flavor, they adopted a JIT approach. They now brew certain special flavors based on pre-orders and anticipated seasonal demand to reduce instances of unsold beer that goes past its prime.
They worked directly with their hops and grain suppliers to set up a schedule that aligned with their brewing calendar. This ensured that fresh ingredients arrived just in time for each brewing batch which eliminates the need to store large quantities for extended periods.
Monthly reviews of their beer inventory highlighted that their "Nebula IPA" wasn't selling as anticipated. They launched a promotional event to clear out this stock to make room for more popular brews.
To ensure the quality of their beer, they reorganized their storage facility to ensure that beers were stored at optimal temperatures and conditions. This reduced spoilage and ensured customers always received fresh beer.
Replacing their old spreadsheet-based tracking system, they integrated a modern inventory management software that tracks each beer batch, offers real-time updates on stock levels, and provides insights on sales trends.
The marketing team, foreseeing a promotional event, coordinated with the brewing and procurement teams in advance. This ensured that the necessary ingredients were ordered, and production could meet the anticipated spike in demand which resulted in a successful event with no stock-outs.
By following these seven steps, Galactic Brews was able to significantly reduce its inventory waste, ensuring that every beer poured was as fresh and delightful as intended, while also optimizing their operational costs.
We hope our article has now left you with a better understanding of what inventory waste is and the proper way of reducing it using our process.
If you enjoyed this article, you might also like our article on what pipeline inventory is or our article on inventory pooling.
