Reduce Inventory Costs: 6 Tips From Order Fulfillment Pros

Running a successful order fulfillment operation requires many things. One of the most important things is inventory—it is, quite literally, the stuff that orders are made of!

While inventory is a requirement for conducting sales and making money, it can also be a source of substantial cost for your operation in the form of inventory carrying costs.

Inventory carrying costs (also called holding costs) are any of the operational expenses related to holding and storing unsold goods. It includes direct operational expenses (such as the cost of warehousing, transporting, and handling inventory) as well as indirect expenses (such as the cost of insuring goods) and intangible expenses (such as depreciation).

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The level of inventory required for your business will directly influence the size of the facility that you either rent or own, which can impact what you spend on things like rent, utilities, and property taxes. Similarly, if you employ workers specifically to interact with your inventory in some way (managing it, transporting it, picking it, etc.) then your inventory practices can have a direct impact on your labor expenses. 

In fact, by some estimates, inventory carrying costs can account for as much as 20–30 percent of the average operation’s total inventory costs. 

With all of this in mind, below we have gathered tips from a number of order fulfillment professionals that you can use to manage and reduce your inventory costs. 

Tips to Reduce Inventory Costs in an Order Fulfillment Environment

1. Measure your inventory-focused KPIs.

Anytime you sit down with the goal of improving something, your very first step should be to put in place a strategy for measuring progress. 

This will include identifying the metric(s) that you are trying to improve; bench-marking your existing reality so that you understand how you are currently performing; and monitoring that metric in an ongoing manner so that you can see whether or not the actions you take are having the intended (positive) consequences.

“An important part of any business, whether it is order fulfillment or material handling, is analysis: You need to be constantly analyzing your operation to see where you are hitting your goals, where you stand to improve with slight adjustments, and where you may need to consider a serious overhaul,” says Raymond Cocozza, President at Conveyco Technologies. “You can’t improve what you don’t measure.” 

There are many order fulfillment KPIs that you should be tracking and monitoring in an ongoing manner, but some of the most critical inventory-focused KPIs include:

• Dock-to-Stock Cycle Time, which reflects the time required to put away goods and can offer insights into the efficiency of your internal inventory processes.
• Inbound Orders Received, which reflects the inbound orders processed per person in an hour at receiving and Lines Received and Put Away, which reflects the lines processed per person in an hour at receiving. Both of these metrics offer an additional layer of insight into the efficiency of your operation and can help you identify areas for improvement.
• Write-offs and write-downs, which can offer insights into how much inventory your operation is wasting.

2. Balance volume discounts against actual need.

When it comes time to order inventory from a supplier or manufacturer, there is a common trap that inventory managers—particularly those newer to the role—can fall into: Buying more product than your operation needs in order to qualify for volume discounts. 

The reasoning here is a sound one. By buying in bulk, you can often drastically reduce your price per unit. So long as you are certain that you will sell the increased number of units in a reasonable window of time, pursuing volume discounts can make great business sense. It does, however, come with a risk: That you will not sell through the inventory, in which case it will accrue as dead money.

“Balancing volume purchase discounts against your actual need is key,” says Andrew Tjernlund, owner and operator of Tjernlund Services. 

He recommends creating hard rules per supplier on when operations ‘buy up for a discount. Putting this logic in place can simplify the replenishment process, add a layer of strategy to the process, and help you avoid costly mistakes driven by a desire to chase discounts.

“Ultimately, high inventory costs often derive from a lack of discipline,” says Tjernlund.

3. Reevaluate safety stock levels.

Stockouts carry the potential to cause a lot of damage for an order fulfillment operation,  leading to late shipments, increased inventory costs, and overall reduced customer satisfaction that risks sending customers into the arms of a competitor. In short, no order fulfillment operation wants to experience a stock-out. 

That’s where the concept of safety stock—the level of inventory that you hold to reduce the risk of an item being out of stock when a customer places an order—originated from. Unfortunately, keeping too much safety stock on hand can cause just as many issues as not holding enough, tying up valuable capital increasing your carrying costs.  

“The most significant and frequently recurring inventory management mistake I often see involves how safety stock levels are set” says David Altemir, of Altemir Consulting. 

Though the common approach is to set minimum stock levels equal to some number of days of average demand, the purpose of safety stock is to absorb variations in demand—often referred to as “spikes.” What is not often understood, says Altemir, is that demand volatility can be reliably quantified to more economically define safety stock levels.  

“I’ve seen one Fortune 500 company who held four to seven times more inventory than was necessary to ensure a 98% fill rate,” he says. “What’s needed to avoid situations like this is a statistically based approach to calculating target safety stock levels.  

4. Work closely with your manufacturer/supplier to meet facilities receipt specifications.

Inbound receiving, the process of receiving inventory from your suppliers and putting it away in the proper location, is a critical step in the fulfillment process. When things go well—when shipments come in from the supplier or manufacturer clearly labeled and organized—the integrity of your overall inventory can be maintained fairly easily.

“When inventory arrives from the manufacturer without barcodes, incorrect barcodes or in mixed cartons, however, the result is increased expenses throughout the remainder of the supply chain,” says Amber Fullerton, Chief Customer Officer at One World Direct. 

“When inbound shipments don’t conform to standard inbounding practices, receiving becomes more expensive due to additional labor hours needed to sort, identify, and organize products. In addition, outbound orders are prone to error resulting in miscounts and leading to stock-outs and/or mis-pick instances.”

If you are experiencing confusion or inefficiencies in your inbound receiving processes, there are a range of actions that you can take to improve. Fullerton specifically recommends working closely with your manufacturers and distribution centers to meet the facilities receipt specifications. 

“Alignment between the manufacturer and distribution center is import to reduced inbound costs, avoid inbound receiving penalties, dock-to-stock delays, and outbound order errors.”

Some other potential ways of streamlining your receiving processes that Fullerton includes:

• Ensuring that an Advanced Ship Notice (ASN) is created well before the shipment arrives
• Ensuring that a unique PO or ASN is visible on the outer carton
• Ensuring that the shipment contains a packing list and that each carton contains a single SKU
• Confirming that labels are scannable
• Labeling outer cartons with SKU and quantities

5. Slot your inventory more efficiently.

Slotting is the process of organizing inventory within your warehouse or distribution center: Assigning all of your inventory a designated space where it should live. Effective slotting practices have the potential to improve the efficiency of any internal processes that directly interact with your inventory—for example, storage, replenishment, order picking and packing, etc.

Unfortunately, ineffective slotting practices can have the exact opposite effect, driving your efficiency and productivity down. 

“If your business is seasonal and has business cycles that change the flow of inventory, slotting will likely be the low lying fruit to increase efficiencies,” says Ed Romaine, VP Marketing and Business Development at Conveyco Technologies. 

“The key is understanding what moves need to be made that will yield the highest levels of return. Your slotting reports should not only show you what SKUs need to be moved to what location, but also what value (return on investment) you can expect from making that move. This allows you as a manager to apply the proper level of labor and time to reap the highest levels of reward. If your software doesn’t provide these type of reports, it might be time to investigate having a valued partner provide this for you.” 

While your individual slotting strategy will of course depend on the specific”s of your operation, including the specific goals you are trying to reach, consider the following opportunities as you decide how you might adjust your slotting process:

• Understand product affinity (which items typically ship together) and consider grouping items with high affinity near each other to reduce time spent traveling during the pick process.
• Consider placing fast-moving SKUs close to the shipping area so that pickers can quickly obtain them.
• Group SKUs by size and dimensions in order to make better use of your space.

6. Consider automation.

If your goal is to drive down your inventory costs by improving the efficiency of your inventory-focused processes, automation offers tremendous potential at every step, from inbound receiving to storage, replenishment, order picking and processing, and more.

• …optimize your inbound receiving process, you might choose to implement radio-frequency identification (RFID) to tag and track goods as they are delivered to your facility and distributed throughout the warehouse, improving inventory visibility and making it easier to find inventory every step of the fulfillment process. You might also leverage automatic depalletizing equipment to break down the shipment, and various sorters to distribute product to the appropriate location for storage.
• …optimize your storage processes, you might implement an automated storage and retrieval system (AS/RS), which can enable you to make the most efficient use of your available space. Depending on your specific needs, AS/RS can also optimize your inventory via FIFO (First in First Out), LIFO (Last In First Out), lot numbers, expiration dates, order cut off times, packaging requirements, and more.
• …optimize your replenishment processes, you might utilize autonomous mobile robots (AMRs), automated guided vehicles (AGVs), or a range of other robotic solutions to automatically retrieve inventory and transport it for replenishment purposes, reducing your labor expenses and preempting stockouts by continuously monitoring inventory levels.
• …optimize your picking processes, you might leverage any combination of AMRs, sorters, AS/RS, and other goods-to-person technologies in order to reduce travel times and enable your workers to be more efficient in retrieving items for inclusion in an order.

Determining Your Best Path Forward

Ultimately, the key to reducing and managing your inventory costs is to find a plan that works for the specifics of your operation—your specific challenges, goals, and operational realities. By understanding your fulfillment processes from receiving all the way through to shipping, it is possible to identify weaknesses in how you manage your inventory, and then determine solutions to address those weaknesses. 

If you are unsure of where to begin, a trusted systems integrator can help you find a custom solution to your meet your goals.

Ready to get started? Schedule a free consultation with one of our expert systems integrators to see how we can help.