Zero inventory or inventory reduction is critical to save money, increase profits, and free up warehouse space. That can be achieved by either increasing the output or reducing the input.
In inventory management, this falls into these two actions:
- Take more items out of the inventory
- Put fewer items in your inventory
You don’t need to learn complex algorithms and procedures. This process is best explained by using the bathtub principle, first introduced by Phillip Slater in his book Smart Inventory Solutions.
The bathtub principle presents the concept of keeping the water in a bathtub either up or down; therefore, you might need to adjust the faucet or the drain (input or output).
The main goal of the bathtub principle is to reduce inventory, and according to Phillip, there are seven ways that will help you do that.
Here is the list of actions that will help you reduce your inventory:
#1: Have someone else store your inventory
The best way to reduce inventory is to remove it altogether! This process is known as consignment stocking, which means you transfer ownership and inventory management to the vendors.
#2: Sell excess and obsolete stock
Obsolete products do not add value to the business and should be removed from your inventory. They cost money to store them, and sometimes, there are some tax gains.
#3: Eliminate duplication
Sometimes the same item can be found with different item numbers (remember they should be unique using the SKU/EAN). This might increase the inventory with the wrong number of products.
#4: Change the factors that drive safety stock
Safety stock is the critical amount of products that, when reached, you have to reorder to keep up with demand. Hold the right amount and increase the replenishment time.
#5: Reduce reordering stock
That’s the specific amount of products needed to reorder when it’s time to replenish your inventory. It should be the minimum to meet demand.
#6: Match delivery with usage
Holding inventory for too long will increase your holding costs. One solution is to use the JIT (just in time) technique, which requires a little more planning to be more efficient.
#7: Reduce the value of items held
Cost reduction on specific items will help reduce the overall value held in inventory to mitigate loss impact in case the item becomes obsolete.
In future posts, we’ll discuss these seven ways in more detail to help you manage your inventory more efficiently.
Source: Smart Inventory Solutions by Phillip Slater