The Top 11 Inventory Reduction Strategies for Ecommerce Success
Home Sweet Warehouse: The author’s living room has become a makeshift warehouse, full of unsold inventory from their small shop.
Fashion Overload: A significant excess of clothing stock that didn't sell is now taking up valuable space within their home.
Small Shop Woes: Running a small business has its challenges, including the difficulty of predicting demand and managing excess inventory.
Living Room Blues: The personal impact of the unsold clothes highlights how business setbacks can extend into one's home and daily life.
Creative Storage Solutions Needed: The author needs to find inventive ways to deal with the surplus clothing occupying their living space.
My warehouse—my living room—is still full of clothes that didn’t sell through my small shop.
We can’t put new furniture in, or use it as a seating space for guests anymore, because where would all the clothes go?
When I look at all the stuff that’s gone unsold, I think of two things:
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One, what a waste of space.
Two, we could've made money selling these clothes. However little.
But I didn’t really know much about how to reduce inventory for my shop four years ago. And if you’re a larger business than we were—excess, obsolete inventory is a monster cost that’s going to keep ballooning until it bursts.
So here, I’m going to walk you through the necessity of inventory introduction, its benefits, and 11 strategies you can use for your ecommerce business to minimize waste and maximize profits.
What is Inventory Reduction?
The process of reducing inventory levels to match them with consumer demand is known as inventory reduction.
The goal of this inventory management strategy is to get rid of excess inventory to make room for more in-demand SKUs.
However, inventory reduction doesn’t have to be reactive.
For example, you can forecast demand more accurately with inventory management software to make proactive decisions about your buying and stocking strategies.
Why Should You Reduce Inventory?
Quick Question: When was the last time you calculated how much your inventory holding costs are weighing down your business?
A company's inventory holding costs are the total cost of keeping unsold goods. In this case, we're talking about:
- Managing warehouses
- Insurance
- Labor costs
- Transportation
- Amount of depreciation on goods
- Inventory shrinkage
- Obsolescence
- Opportunity costs (Losses in terms of money or benefits if you don’t choose a specific option during the decision-making process)
If you’re the type that likes looking at formulas, here’s what that looks like for inventory holding cost:
Inventory Holding Cost = (Storage Costs + Opportunity Costs + Depreciation Costs + Employee Salaries) / Total Value of Annual Inventory
As your ecommerce business grows, so does your inventory, sales, and the need for bigger warehouse spaces.
This means that if you don’t optimize your stock levels, your warehouse runs the risk of being nothing more than a storage facility instead of a moving conveyor belt of cash flow.
And let’s not forget about business taxes.
If you have too much unsold inventory on hand at the end of the year, you'll have to pay more in property taxes and income tax bills.
Brooke Webber, head of marketing at Ninja Patches, says that their company has been supplying for years and working with the same clients, so they have “a clear forecast and expectations for peak seasons and know exactly what inventory we typically need during these times.”
They use QuickBooks for optimizing inventory levels:
It helps us manage stock levels, process orders efficiently, and forecast demand.
Since implementing this software, we've seen a 20% reduction in excess inventory and improved order accuracy.
Benefits of Inventory Reduction
A stunning $1.75 trillion loss was recorded in 2021 by retailers because of poor inventory management.
Conversely, businesses that invest in inventory optimization and address overstocking and understocking can reduce their inventory costs by 10%.
There are three significant benefits of inventory reduction:
1. Cost reduction
There’s less money tied up in inventory, which means you’re not wasting business capital. You’ll also need less warehouse space once you get rid of obsolete stock.
Consequently, insurance costs will be lower, since there’s a reduced risk of loss.
And, there are fewer losses due to spoilage of perishable items, or expired and out-of-date products.
2. Optimizing operational efficiency
You’ll need less labor to track and manage your inventory. This means more effective warehouse management.
Since smaller warehouses are easier to supervise, you’ll need fewer people to maintain your storage units.
3. Improved product quality
A lean inventory allows for quicker identification of product issues and faster adoption of new, better products in response to market changes.
This means quicker resolution of product defects, and less risk of being stuck with obsolete, spoiled, or faulty inventory.
Disadvantages of Inventory Reduction
I spoke with Michael Nemeroff, the CEO and co-founder of Rush Order Tees—a family-owned apparel ecommerce brand based in Philadelphia.
While inventory reduction minimizes costs and frees up space, he says, there’s a potential downside:
…it can also lead to stockouts if demand unexpectedly spikes.
For example, during peak seasons like holidays, a lean inventory approach can sometimes result in delays if we run out of popular items.
This has happened to us especially when the items that don't typically get ordered suddenly received a lot of orders.
We had to source them quickly to ensure we can cater to our customers' needs.
For accurate replenishment of in-demand SKUs, you need to know how to balance being aggressive without running out of stock by collaborating with your cross-functional teams.
Think of your inventory like water in a reservoir.
Too much is stagnant and costly, too little hinders growth. You need to find the sweet spot to keep your business flowing smoothly.
How to Reduce Inventory: 11 Proven Strategies
How can your ecommerce business streamline stock levels without selling out?
Let’s look at 11 tried-and-true inventory reduction strategies so you can meet customer demand while optimizing your inventory.
1. Get rid of obsolete stock
In inventory management, obsolete items are products that have reached the end of their lifecycle.
It's basically dead stock with little to no chance of being sold.
When left idle, this asset drains resources and can be very costly to manage. For my business, this took the form of moth-eaten winter wear that wouldn’t sell, but was still taking up warehouse space. (My living room, that is.)
I reached out to the founder of Manzuri, Ritesh D. Ritelin—an ecommerce brand that “sells orgasms for a living.”
They’re one of the leading players in the Indian sexual wellness space.
These are some example strategies.
When combined with additional tactics such as product bundling, seasonal sales, and donations, they can help you get rid of obsolete stock, increase profits, and optimize your product offerings.
2. Recycle and upcycle unsold inventory
Make the most of your unsold or obsolete inventory by implementing a recycling program.
In addition to reducing excess inventory, this approach aligns your business with sustainable practices, which can boost your brand image and appeal to environmentally conscious customers.
- Partner with recycling companies. Look for local or specialized recycling companies that can handle your specific products.
- Donate to charities. Not everything can be sold or recycled, but charities can still use it.
- Offer a take-back program. Offer customers discounts on new purchases if they return used or old products.
3. Take a just-in-time (JIT) inventory approach
In JIT inventory management, raw materials are delivered as production is scheduled to begin, but no earlier. This requires close coordination with suppliers.
You'll need a minimum amount of inventory on hand to meet customer demand.
Luckily, I was able to speak with Abhi Madan, co-founder and creative director of Amarra, a high-end fashion brand.
We use a unique blend of just-in-time manufacturing and dropshipping, which allows us to make our garments exactly when we need them and ship them straight to the consumer or retailer.
More specifically, they don’t mass produce.
Instead, they have their orders handcrafted when the orders are placed. This not only reduces inventory levels, but also “fosters a culture of sustainability.”
There’s more, Abhi says:
This approach has a second benefit—it allows us to quickly react to emerging fashion trends and customer preferences.
4. Consider dropshipping
What if you want to sell your products without storing them physically in a warehouse? That’s dropshipping.
Dropshipping is a $225 billion global market, and it can boost retailers’ profit margins by up to 50%.
How?
Instead of buying a bunch of products upfront and hoping they sell, you partner with a supplier who takes care of inventory and shipping.
Dropshipping reduces carrying costs and frees up capital by eliminating the need to store and manage physical inventory.
The beauty of dropshipping? No warehouse needed, no shipping labels to worry about. This is a great way to test different products and discover what sells without investing too much upfront.
When someone buys something from your ecommerce store, the order goes straight to the supplier, who delivers it directly to the customer.
5. Enhance demand forecasting
The process of inventory forecasting involves combining data from multiple sources.
This includes historical sales data and real-time sales figures, general market trends, customer behaviors, and external factors such as supply chain issues.
There’s some guesswork involved, but the more information you have, the more accurate the prediction should be.
When you forecast demand, you stock exactly what you need to meet customer demand—when you need it. This lean inventory reduction approach keeps your operations efficient and your bottom line steady.
Example:
- Establish a baseline: Say a t-shirt company sold 5,000 units in the previous summer season. This becomes the foundation for the average inventory forecast.
- Identify influencing factors: These include trends (e.g., the rising popularity of sustainable fashion), marketing initiatives (e.g., celebrity endorsements), and external conditions (e.g., economic downturns).
The company can adjust the initial forecast of 5,000 units accordingly, aiming for an accurate prediction.
Forecasting demand is quicker, and much more streamlined with intelligent inventory planning software.
6. Introduce product bundling and kitting
True story: The Body Shop is shutting down operations in the US.
Natura noted in early 2023 that The Body Shop was "(facing) headwinds," with a year-over-year decline of 13.5% in 2022.
Stay with me.
They’re shutting down operations, but they still have inventory to move. Plus, it’s perishable inventory.
The company is going through a massive internal restructuring, and to make space for new products in the near future, they’re selling kitted and bundled products in hyperdrive.
Kitting and bundling involves grouping items together and selling them as a single item.
The combination of slow-moving items with popular products helps reduce inventory and increase sales velocity. This lets you get rid of excess, obsolete inventory—quick.
And you know what? It works. Check out this out-of-stock bundled gift set:
You don’t need to be shutting shop to learn a thing or two from The Body Shop’s inventory reduction strategy. Quite the opposite, really.
This strategy is effective on two fronts:
- Clearing stagnant stock more quickly, and creating attractive value propositions for customers. (As someone who owns a bundle myself, I can testify to its effectiveness.)
- Reducing excess inventory and associated holding costs.
7. Learn your ABC analysis
An ABC analysis is an inventory management strategy to determine the inventory value of the items based on their importance to your business.
The A, B, and C categories helps you focus on high-value products.
It’s based on the Pareto Principle—basically, you can generate 80% of your revenue from 20% of your products.
Category A
These are high-value items with consistent demand and require close monitoring due to their impact on revenue.
For my thrift shop, an example of a “Category A” product was a batch of vintage, ethically sourced, and authentic Burberry mufflers.
For two consecutive Delhi winters, we sourced these regularly and sold off each one—faster than any other item in our shop.
Category B
These are moderate-value items with steady demand. Think, pure silver earrings.
Category C
These are low-value items with infrequent demand and require minimal attention. These were plain workwear shirts or black trousers for us.
The ABC analysis optimizes your inventory management systems and resource allocation by prioritizing high-value items.
Based on this analysis, you can also identify which products you want to sell as bundles.
8. Use advanced inventory management software
Inventory management is a lot like playing Tetris—every piece counts, timing is everything, and the right tools can help you clear the board.
Roman Zrazhevskiy is the founder & CEO of MIRA Safety—an online retailer specializing in preparedness and readiness equipment—and to optimize their inventory reduction processes, they use NetSuite:
NetSuite offers excellent inventory management features and provides real-time data, helping us make informed decisions and reduce excess inventory by 20%, thus improving our overall efficiency.
The correct inventory management software for your business can boost efficiency by automating tasks, providing real-time data, and optimizing stock levels.
Ultimately, this drives down costs and increases profits.
The question is, which inventory management software is the best choice for you? Here are our top 10 picks:
9. Automate inventory processes
There are many reasons why inventory and fulfillment problems pop up.
But the most common one? Human error. We aren’t computers. We have bad days, sometimes we get little to no sleep, and so we make mistakes.
And these mistakes are expensive. (As expensive as 30% of your business revenue.)
However, there’s one thing you can control: the tools your team has to do their jobs better. Automated inventory management systems eliminate manual data entry and improve forecast accuracy to almost 100%.
The precision of this process directly translates into inventory reduction through several key benefits:
- Optimizing reorder points. Accurate, real-time inventory data is essential to calculating reorder points accurately and minimizing stockouts and overstocks.
- Identifying slow-moving items. Automated systems can quickly identify slow-moving items, helping businesses get rid of excess stock that much faster.
- Improving demand forecasting. More precise sales data makes it easier to predict future demand, which reduces excess stock.
Learn how to effectively reduce inventory with real-time data—see how a perpetual inventory system can help streamline your stock management.
10. Strengthen comms with supply chain partners
Michael of Rush Order Tees says that by “coordinating closely with our suppliers, we ensure that materials arrive just as they are needed for production. This strategy has significantly reduced our storage costs and improved cash flow.”
One of the building blocks of efficient inventory management is building strong relationships with suppliers.
Keeping communication and collaboration open can help you optimize production schedules and cut carrying costs.
11. Reduce supplier lead times
Following from the above, shorter supplier lead times mean leaner inventories.
Having close relationships with suppliers can help businesses reduce the need for safety stock by expediting production and delivery.
The result? A freed-up warehouse and better cash flow.
Inventory Reduction: The Bottom Line
Too much stock, and you're bleeding money. Too little, and you risk losing customers.
But with the right strategies and tools, you can find that sweet spot. From just-in-time inventory to smart bundling, we've covered ways to keep your stock lean and mean.
At the core of it all? Good inventory management software—offering insights and automation to keep things running smoothly.
Take these ideas into action and leverage technology to turn your warehouse from a money pit into a profit machine.
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Inventory Reduction FAQs
OK, we’re not totally done. It’s Q&A time! We thought of the questions you might have and here we are with the answers.
Which inventory reduction strategy is the best?
In the world of inventory, there’s no magic wand to wave away your stock woes. The “best” strategy for your business will depend on your specific needs.
Your business model, products, and market conditions will determine the best approach. Nevertheless, advanced inventory management software often makes the biggest difference across a variety of strategies.
How can excessive inventory be reduced?
Start by getting cozy with your data.
- Forecast demand more accurately with inventory management software.
- Consider lean inventory management approaches like JIT.
- Bundle slow movers with bestsellers to get everything moving.
- Talk to your suppliers. Building strong relationships can help you optimize production schedules and cut carrying costs.
Inventory reduction isn’t a one-time purge, it’s an ongoing process.
Can you work with your suppliers to help reduce their lead times?
Absolutely! Think of it as a partnership rather than a transaction. Maintaining a lean inventory and reducing safety stock is easier when you’re in constant communication with your suppliers.
