Reducing or eliminating excess inventory is one of the most effective ways to save money, increase profits, and free up valuable warehouse space. This can be done by either increasing the output or reducing the input of inventory.
In inventory management, this translates into two core actions:
- Move more items out of inventory
- Add fewer items into inventory
You don’t need complex systems or advanced algorithms to start. One of the simplest ways to understand this concept is through the bathtub principle, introduced by Phillip Slater in his book Smart Inventory Solutions.
The bathtub principle compares inventory to water in a tub. To control the water level, you adjust the faucet (input) or the drain (output). Similarly, to reduce inventory, you either control what comes in or what goes out.
According to Slater, there are seven practical strategies you can apply to reduce inventory:
#1: Have someone else store your inventory
Use consignment stocking by letting vendors take ownership and manage certain inventory. This reduces what you hold on-site and lowers your overhead.
#2: Sell excess and obsolete stock
Remove items that no longer provide value. Not only do they occupy space, but they may also have hidden carrying costs or potential tax benefits when written off.
#3: Eliminate duplication
Ensure each item has a unique SKU or EAN. Duplicate entries inflate inventory counts and can cause unnecessary reorders.
#4: Change the factors that drive safety stock
Reevaluate how you calculate safety stock. Optimize reorder points and lead times to hold only what’s necessary while still meeting demand.
#5: Reduce reordering stock
Keep reorder quantities minimal but sufficient. The goal is to avoid overstocking while ensuring availability.
#6: Match delivery with usage
Use techniques like Just-in-Time (JIT) to better align deliveries with actual consumption. This reduces holding time and costs.
#7: Reduce the value of items held
Focus on lowering the cost of inventory on hand. Carrying lower-value items reduces financial risk if those items become unsellable.
We’ll explore each of these methods further in upcoming posts to help you implement them effectively in your business.
Source: Smart Inventory Solutions by Phillip Slater