Picture this: You’ve got a pile of materials collecting dust in the corner of your warehouse while the cost of storing them adds up, with no hope of generating any profits.
It’s a classic case of inventory waste, and it’s more common than you might think. For many businesses, wasted goods lead to extra storage costs, inefficiencies, and missed opportunities — so it’s crucial to reduce them as much as possible.
In this article, we’ll dive into the types of inventory waste, its impact on your profitability, and how to take practical steps to eliminate it. Keep reading to learn more, or jump to the bottom to discover how Fishbowl can help you cut back on waste and streamline your operations.
Understanding inventory waste
Inventory waste refers to any stock you hold that isn’t being used and doesn’t contribute to your production process. Holding too much stock can lead to spoilage or obsolescence, especially if your materials have a limited shelf life or are subject to market fluctuations.
It also unnecessarily increases holding costs. You’re paying to use every inch of space you have, and filling it with materials that won’t turn into sellable products prevents you from using that square footage for more valuable inventory. This drains resources and ties up capital, impacting your bottom line and operational efficiency.
Types of inventory waste
Here are the five main types of waste that can put a serious dent in your operational efficiency.
Raw materials
Excess raw materials are one of the most common culprits of inventory waste. Without effective production planning and inventory tracking, you might overorder the materials or inputs that end up sitting on the shelf unused.
Sub-assemblies
Sub-assemblies are parts of your product that are made in advance but still need to be assembled. While they’re often necessary for a smooth production process, overstocking sub-assemblies leads to wasted space and unnecessary handling.
Finished goods
Finished goods inventory piles up quickly, especially if demand is unpredictable. But overstocking finished products ties up your cash, and you risk some inventory becoming obsolete. This is a significant source of inventory waste since your finished products are so valuable — you’ve already poured lots of time, money, and other resources into them, so you don’t want to hold onto them any longer than you have to.
Another risk of holding excess finished goods is increased shrinkage. When inventory sits in storage, the likelihood of theft, damage, or misplacement rises. Shrinkage can quietly eat into your profitability, especially if it goes unnoticed for too long.
Office supplies
It’s easy to overlook office supplies, but they can easily become a substantial source of inventory waste. If you’ve got a stockroom full of pens, paper, and printer cartridges you’ll never use, you’re just wasting money. Likewise, if your employees often lose such items or use them inefficiently, you’ll spend more on this type of inventory than it’s worth.
Maintenance, repair, and operations (MRO) inventory
MRO items — like tools, parts, and machinery spares — are integral to running your production line smoothly. However, having too many MRO items in stock can cause you to waste shelf space and suffer cash flow issues. It’s important to monitor and manage these supplies carefully to ensure you’re not overstocking items that won’t be used anytime soon.
Common causes of inventory waste
Inventory waste doesn’t just happen out of nowhere. It’s often the result of several key factors that can be controlled. By understanding what’s causing the waste to accumulate, you can take action to prevent it. Here are some of the most common causes.
Overproduction
Overproduction is one of the biggest drivers of inventory waste. When you produce more than what’s needed to meet demand, excess inventory starts piling up on the shelves. Depending on the materials or products involved, this overstock — including some of the raw materials — can quickly become obsolete or spoil. Even if it doesn’t, it ties up valuable resources that won’t get poured back into your company if these items aren’t sold.
Additionally, overproduction canstrain your ability to work with agility. When your inventory is bloated with products that aren’t moving, the entire production cycle slows down. This not only affects your current orders but also hampers your ability to pivot or scale production when market demands shift.
Time-based inefficiencies
Time-based inefficiencies include employee downtime, waiting for parts, long changeover times, and unnecessary handling. These contribute heavily to inventory waste by creating delays in the manufacturing process. In turn, parts or materials sit unused for longer than necessary.
Inefficient manufacturing processes
Inefficient manufacturing processes often result in a lot of manufacturing waste. If you’re using outdated methods, redundant steps, or poorly calibrated equipment, you may sink more resources than necessary into items that must ultimately be discarded.
A common type of process inefficiency is overprocessing. This occurs when you put more work into a product than necessary to meet customer expectations — for example, using overly complicated methods to polish components that don’t require a high-gloss finish. The extra effort might seem to add value, but it often doesn’t, meaning your resources have gone to waste.
Poor inventory quality
Poor inventory quality can create waste in a big way. If materials or components are defective, damaged, or otherwise unsuitable for production, they’re essentially useless and need to be discarded. This wastes raw materials and the time and money spent acquiring, storing, transforming, and handling them.
Additionally, dealing with low-quality stock can slow down your production lines. Say your employees often have to stop to replace defective parts or redo work because the materials aren’t up to standard. These interruptions ultimately create more waste in the form of increased downtime and added labor costs.
Excess transportation
Moving products or materials too frequently or too far costs extra, and it increases the risk of damage or spoilage. Extra handling and transportation can also lead to delays that cause inventory to sit in transit or storage longer than is ideal.
How to reduce inventory waste: 6 best practices
Once you identify the source of your inventory waste problem, you can start to address it. Here are six proven methods for reducing waste and restoring operational efficiency.
1. Don’t settle for subpar inputs
A longstanding relationship with your suppliers can benefit you in many ways. Volume discounts, flexible payment options, and trust built over time all contribute to a healthy supply chain. But if your suppliers start slacking — sending subpar materials that slow down production or lead to defects — it’s time to reevaluate.
Don’t let loyalty cloud your judgment. Your business deserves quality inputs. Research and test relationships with new suppliers who can meet your standards and consistently deliver on their promises.
2. Implement a new inventory management system
You can’t rely on guesswork for effective inventory control. With precise inventory management software like Fishbowl, tracking what comes in and what goes out is easier than ever. Fishbowl also offers advanced tools like demand forecasting, turnover ratio metrics, and automatic reorder points to help you maintain optimal stock levels. Plus, it integrates seamlessly with QuickBooks to streamline your financial management.
Combined with an inventory strategy like just-in-time (JIT) management, you can optimize inventory levels further by ordering materials only as they’re needed for production. This approach reduces inventory waste and keeps operations lean.
3. Plan for equipment failure
Unexpected equipment failure can disrupt production and lead to wasted materials and delays. A proactive approach to maintenance minimizes these risks. Establish a preventative maintenance schedule to inspect and service equipment regularly so you can catch potential issues before they become major problems.
4. Use a Kanban system
A Kanban system helps streamline inventory management by visualizing the flow of materials and production, usually with color-coded cards for different statuses. It’s often used in connection with JIT management, as it signals clearly when more inventory is needed. This prevents overproduction and understocking, which in turn keeps operations efficient.
5. Optimize storage space
Inefficient storage can lead to waste, especially if items are difficult to locate, access, or organize. Invest in warehouse management strategies like slotting optimization, where inventory is based on factors like order frequency or size. Proper labeling and categorization further ensure quick access and reduce the risk of misplaced or expired inventory.
6. Train your team on best practices
Teach employees how to properly handle inventory, perform quality control checks, and work efficiently on the production line. Encouraging communication between departments can also address inefficiencies and provide opportunities to share solutions.
Reduce inventory waste and optimize operations with Fishbowl
Ready to take control of your inventory? With Fishbowl, you can minimize waste and maximize productivity. Fishbowl ensures accurate tracking and efficient management of your inventory, so you always know exactly what you have and what you need.
Schedule a demo to discover how Fishbowl can transform your business today.