How Do I Reduce Inventory Costs for My Online Shop? (Answered)

Inventory carrying costs can eat up as much as 30% of your total inventory value every year.

That means if you’re sitting on $100,000 worth of stock, you’re likely spending around $30,000 just to hold it. Not to grow sales, not to launch new products, just to keep things on a shelf.

For a lot of stores, this isn’t obvious at first. The costs are scattered across storage fees, slow-moving SKUs, expired stock, and last-minute reorders. 

Nothing looks huge on its own, but it builds up fast. And by the time you notice, cash is already stuck in inventory that’s not moving.

We cover real and effective ways to cut down inventory costs for your online store. 

Understanding Inventory Costs

Inventory costs are the total expenses a business incurs on buying, storing, managing, and sometimes losing value on the goods. 

These costs don’t just show up on a single line in your books. They’re spread out across multiple parts of your operations.

There are four main categories you need to track

• Ordering costs: These include everything involved in placing and receiving stock — administrative work, purchase processing, supplier communication, delivery charges, and inspection on arrival.
• Holding costs: This is the cost of keeping inventory in storage. Think warehouse rent, utilities, insurance, depreciation, and the labor needed to move, count, and manage those goods.
• Shortage costs: These hit when inventory runs out. You lose sales, delay fulfillment, damage customer trust, and in some cases, lose long-term business.
• Obsolescence costs: This is what you pay when items become unsellable — expired, outdated, or just sitting too long. You either sell at a loss or write them off entirely.

High inventory costs hurt both cash flow and profitability. Money tied up in stock can’t be used elsewhere, which puts pressure on day-to-day operations. 

If you’re holding too much, you’re bleeding through storage and profit shrinkage. If you’re holding too little, you’re losing sales and customers. Either way, margins shrink.

Before you reduce any costs, you need to know what you're actually spending, and where.

Common Challenges in Inventory Management

Inventory issues show up fast when decisions are made with gut feelings. Most businesses deal with the same three problems, and they’re costly if left unchecked. These include 

1. Overstocking

Overstocking happens when a business holds more inventory than it can sell within a normal sales cycle. It usually comes from over-ordering during seasonal demand, playing it too safe after a stockout, or responding to supplier discount pressure.

Extra stock ties up cash, increases warehousing and handling costs, and runs the risk of becoming obsolete. Electronics, fashion, and perishable goods are especially vulnerable.

Target’s 2022 misstep is a clear example. After overestimating post-pandemic demand, the company was left with $15 billion in excess inventory, leading to markdowns and a major reset in supply chain strategy.

2. Stockouts

Stockouts aren’t just a missed sale. They hit customer trust. If someone can’t get what they want when they want it, there’s a good chance they won’t return.

This usually happens when sales and supply chain teams aren’t aligned. Reordering gets delayed, demand spikes are missed, or visibility across locations is poor. Every one of these points adds friction, and customers don’t wait around.

3. Inaccurate Demand Forecasting

Poor forecasting sits at the center of both overstocking and stockouts. Most teams rely on past sales trends to predict future demand, which can fall apart during sudden shifts, like weather changes, supply disruptions, or new competitors entering the market.

During the pandemic, most retailers struggled with this. Some couldn’t keep essentials in stock, while others were left holding seasonal goods no one could buy. Forecasts made on old patterns just didn’t hold up.

Zara handles this differently. By producing in shorter cycles and responding to real-time store data, they reduce their reliance on long-term forecasting and move with actual demand.

If you use a tool like Prediko, you can also respond to real-time data and demand across stores so that your forecasts reflect what’s happening now, not what you predicted last year.

5 Proven Strategies to Reduce Inventory Costs

There’s no single fix for high inventory costs, but certain strategies have been tested across industries and continue to deliver results. 

These aren't temporary workarounds or theories. They’re grounded in how real companies manage demand, stock levels, and supplier relationships to cut costs and reduce waste. 

1. Implement Just-In-Time (JIT) inventory

Just-In-Time inventory means receiving materials, parts or products only when they’re needed. That means no over-ordering to “play it safe,” no stocking up months in advance, and no cash tied up in inventory sitting in a warehouse. 

JIT cuts inventory down to what’s required right now, not what might be useful later.

The system was made famous by Toyota as part of its lean manufacturing model.

The goal is simple: reduce the time between receiving materials and using them in production. Materials arrive exactly when needed, production runs continuously without delays, and there’s little to no excess inventory at any stage.

This method changes how a business thinks about inventory. It's no longer a cushion for uncertainty but a precise, scheduled resource aligned to actual demand.

Benefits of JIT inventory in reducing holding costs

Inventory holding costs often go unnoticed because they’re buried in monthly expenses. JIT makes those costs impossible to ignore by reducing them at the source.

• Less warehouse space is needed, which cuts rent or utility costs
• Insurance costs go down since there’s less inventory to cover
• Fewer products are lost due to expiration, damage, or obsolescence
• Cash isn’t tied up in materials that won’t be used immediately

When Toyota adopted JIT, it cut inventory costs by reducing the time raw materials spent in storage. This was one of the key components behind Toyota’s lean manufacturing success. 

Requirements for Successful JIT Implementation

JIT is precise, but it also leaves little room for error. It depends heavily on coordination, timing, and real-time visibility. For JIT to actually reduce costs without creating new risks, certain conditions must be in place.

• Consistent supplier performance is non-negotiable. Materials must arrive on schedule every time. If a supplier fails to deliver on a Friday and production depends on it Monday morning, the entire line stalls.
• Accurate demand forecasting is required to avoid underordering. Forecasting errors can mean running out of components when customer orders spike.
• Strong communication workflows are needed to keep purchasing, production, and logistics aligned. JIT doesn’t allow for silos or guesswork.
• Real-time inventory visibility is essential. Businesses must know what’s available at every stage of the supply chain so reorders are triggered automatically and precisely.

All the above conditions can be fulfilled using Prediko. The inventory software supports real-time inventory tracking, automates reordering, and centralizes supply chain communication so JIT can be implemented without breakdowns.

2. Conduct ABC analysis

ABC analysis is a method to rank products based on their impact on revenue. A items are top performers, B items are moderate, and C items are low-value or slow-moving. This helps retailers decide what to stock, where to store it, and how to manage purchasing.

Andy LaPointe, owner of a Shopify store that sells gourmet food and wellness supplements focused on tart cherry products, used ABC analysis to take control of inventory costs. His store’s recent growth rate ranks in the top 1% of over 1 million brands on Shopify.

In 2021, Andy and his team ran an internal ABC analysis across their 50+ SKUs, which included cherry juice concentrates, dried fruits, salsas, and capsules. They grouped the products like this

• A Products included high-volume items like their award-winning salsas and sauces. These made up about 25% of SKUs but contributed over 70% of revenue
• B Products such as dried fruit and fruit butters were steady sellers, accounting for another 25% of SKUs and around 20% of revenue
• C Products were niche, seasonal items like specialty jams or cookbooks that made up half the catalog but just 10% of the revenue

With this breakdown, they took targeted action

• Relocated A items closer to the front of the fulfillment center to cut picking time
• Negotiated volume discounts with suppliers for B products
• Created seasonal bundles for C items to reduce long-term storage

The result: inventory carrying costs dropped by 22% in six months. That freed up cash, which they redirected into retargeting and SEO efforts with clear ROI gains.

Curious how to apply this to your own store? Dive into our blog on how to use ABC analysis for your Shopify store, where we break it down further.

Prediko helps Shopify merchants run ABC analysis automatically by pulling product sales data and classifying ABC products based on revenue contribution.  

It displays the breakdown on a single dashboard. 

You can customize thresholds, view real-time sales and inventory levels for each category, and apply filters to adjust your replenishment or bundling strategy.

Once the setup is done, Prediko flags A items that are at risk of stockouts, recommends reorder quantities, and shows which C items might be tying up space or cash.

3. Use demand forecasting tools

Demand forecasting is one of the most direct ways to cut inventory costs. It helps you align purchasing with actual customer demand, avoid tying up cash in excess stock, and prevent lost sales due to stockouts. 

For Shopify stores dealing with multiple SKUs or seasonal shifts, forecasting helps make smarter, better-timed purchasing decisions.

Modern demand planning tools use historical sales, real-time inventory levels, lead times, and even seasonal trends to create forward-looking demand plans. They factor in

• Sales performance across different time periods
• Supplier lead times, so reordering happens with enough buffer
• Inventory turnover rates to identify slow or fast-moving items
• External patterns like promotions or holidays that affect demand

By planning based on actual sales behavior and operational timelines, you reduce the need for safety stock and avoid large over-orders that take months to clear.

Prediko is a perfect solution to put this into action. It connects directly to your Shopify sales and inventory data, then uses AI to forecast demand for each SKU based on seasonality, growth trends, and past sales. 

It also factors in supplier lead times and sales velocity, so you know exactly when to reorder and keep your inventory lean without missing sales.

On Shopify’s App Store, Brends Grands Wholesale praised Prediko, saying, “It’s saving me from hiring a $70K inventory manager! Highly recommended.”

4. Optimize order quantities and reorder points

Reducing inventory costs doesn’t mean buying less, it means buying smarter. Two key metrics that help make better purchasing decisions are Economic Order Quantity (EOQ) and reorder points. 

EOQ calculates the most cost-efficient order size by balancing ordering and holding costs. It prevents over-ordering that leads to dead stock and under-ordering that increases shipping frequency and admin load.

Reorder point, on the other hand, is the stock level where you trigger a new purchase order for reordering inventory. It’s based on how fast you sell and how long your supplier takes to deliver. Set it too low and you risk stockouts, too high and you tie up working capital.

To improve this process

• Shorten lead times by working with faster suppliers or better freight partners
• Recalculate EOQ and ROP regularly based on demand shifts or supplier changes
• Set safety stock levels based on real-time demand and inventory usage
• Implement software to automate EOQ and reorder point calculations

Prediko automates all the complex calculations of reorder points and EOQ by letting you set minimum and maximum days of cover for each SKU. It then

• Recommends reorder quantities and timings based on recent sales velocity and supplier lead times
• Sends restock alerts when stock falls below your minimum
• Flags products sitting above your max cover, so you can slow down reordering or adjust strategy

This turns reorder planning from a static setting into a live system that adapts with your store’s demand. You stay ahead of stockouts while keeping excess inventory in check.

5. Adopt inventory management software

Manual inventory management methods lead to wasted resources and increase the chances of errors as order volumes grow or the product catalog expands. 

An inventory management software brings visibility and control to every SKU, across every sales channel, with real-time tracking. It doesn’t just track stock, it helps prevent costly mistakes like duplicate orders, overselling, or running out of fast-moving items.

With real-time view, you know exactly what’s in stock, what’s incoming in your purchase orders, and what else needs to be ordered. That level of detail helps

• Avoid accidental overordering
• Spot and act on stockouts early
• Coordinate better with suppliers 

For stores running across multiple stores or locations, this kind of visibility is non-negotiable.

Not all inventory management apps offer the same level of functionality. Useful features to look for

• Central dashboard showing live inventory levels across locations
• Low stock alerts and reorder recommendations
• Integration with Shopify and other ecommerce platforms
• Demand forecasting capabilities
• Supplier and lead time tracking
• Purchase order generation and tracking

Prediko combines forecasting and inventory management into one app. It connects directly with Shopify, tracks inventory in real time, and uses relevant data to generate demand forecasts. 

It sends reorder alerts based on defined thresholds, lets you manage safety stock, and create purchase orders without switching between tools.

This all-in-one structure makes it easier to manage inventory while also planning for future demand, keeping both overstock and stockouts in check.

How Prediko Helps Reduce Inventory Costs

Prediko is an AI-powered inventory management and forecasting software designed for Shopify brands. Every feature in the platform exists to prevent overstock, avoid stockouts, and reduce time spent manually planning.

1. Real-time Shopify sync for precise inventory tracking 

Designed specifically for Shopify stores, Prediko syncs all your sales and inventory data to provide actionable insights.

This integration simplifies workflows, reduces manual processes, and improves operational efficiency, leading to lower labor and error-related costs.

2. Accurate demand forecasting and supply planning 

Prediko uses AI to analyze historical sales data and predict future demand with high precision. 

By providing granular monthly sales breakdowns, it allows businesses to order the right quantities based on actual demand, reducing excess inventory and stockouts. 

3. Purchase order management

Prediko automates purchase order creation, reducing manual errors and saving time. This process ensures timely reordering, preventing last-minute orders or over-ordering. 

Automation also reduces admin work, allowing businesses to focus resources elsewhere and improve cash flow.

4. Real-time inventory visibility, reports, and analytics 

With real-time tracking and analytics, Prediko provides insights into stock levels, sell-through rates, ABC classification, and high-priority items.

This helps businesses make informed decisions, avoiding costs like warehousing and spoilage. Real-time data also supports faster response to demand fluctuations.

Many stores reach a point where managing inventory becomes a full-time job. With Prediko, core planning functions like generating purchase orders, checking supplier timelines, and reviewing forecasted demand come under just one app, saving you time and money. 

Reduce Inventory Costs with the Right Technology 

Inventory costs add up quickly when purchasing is disconnected from actual demand or when stock sits idle for too long. 

The strategies in this guide, from the just-in-time inventory approach and ABC analysis to forecasting tools and reorder planning, will help you make smart, timely, and cost-conscious inventory decisions.

Prediko’s app brings all these strategies into one place. It forecasts demand, tracks supplier lead times, flags stock issues before they escalate, and helps you plan purchases based on real sales data. You reduce costs without overcomplicating your operations.

Start your 14-day free trial with Prediko and increase cost efficiency with every decision.

Frequently Asked Questions

Q. What is the most effective way to reduce inventory holding costs?

The most effective way is to stock only what you need –by improving demand forecasting, setting reorder points, and eliminating slow-moving SKUs. This reduces excess inventory, storage fees, and tied-up capital.

Q. How does demand forecasting contribute to inventory cost savings?

Accurate demand forecasting helps you order the right products, in the right quantities, at the right time. It prevents overstocking (which increases holding costs) and understocking (which leads to missed sales).

Q. Can small online stores benefit from inventory management software?

Absolutely. Even small stores can save time, reduce errors, and make smarter purchase decisions with inventory tools, especially when juggling multiple SKUs, sales channels, or suppliers.