Investment into inventory needs to be carefully balanced. Invest too much and you can struggle to manage your storage space, stock rotation and more, leading to lower profits. Invest too little and you could be faced with stock-outs, losing you customers and decreasing your sales.
Inventory costs are a big part of any retail business and knowing where your money is being spent may help you streamline your inventory process and enhance your profitability.
In this blog post we are going to look at the three key elements that make up your inventory costs.
Ordering costs are incurred each time you place an order, and are actually much more substantial than the cost of a phone call or purchase order. Typical retail business ordering costs can include:
Placing orders can take time and this is needs to be taken into account when calculating your ordering costs. If you have a dedicated purchasing manager or team then their salaries fall into this bracket too!
Depending on how you place your orders you may incur accounting, purchase order creation or order processing costs. Telephone calls and other communications should also be included in clerical costs. If you use a sophisticated inventory management software with PO management tools, the cost will be less. But hey, there will be some costs.
The cost of transporting your goods to stores or warehouses can vary greatly depending on what you are selling! It will cost a lot more to transport 500 televisions that it will to transport 500 boxes of paperclips!
Once you get your delivery you will need someone to check the goods to ensure that they match your order are all accounted for and are all in good condition. We all know once you sign for something, you are stuck with it! You will also need people to unload the delivery and put it into the relevant storage.
Although this is something that (hopefully!) won’t happen on a regular basis, time and money will need to be spent searching for the right suppliers and potentially meeting with them to seal the deal.
Electronic Data Interchange (EDI) costs:
EDI replaces post, fax and even email as a method of sending information between a vendor and supplier. It uses a standard format that can automatically exchange between their internal computer systems, eliminating the majority of human involvement and reducing processing costs.
As you have probably guessed, these are the costs incurred by holding onto your products and storing them before they are sold. These can include:
Obviously these will vary depending on how much space you need and whether you own or lease your storage. You will also need to include depreciation, property tax and any facility costs (e.g heating or lighting) into this value.
Cost of Inventory Services:
Handling goods is expensive and this cost relates to insurances, security and any other services that may be needed at the point of storage. It also includes IT hardware such as RFID scanners. Inventory control and cycle counting should also be included in this cost.
Cost of Inventory Risk:
This calculates the risk that your products may fall in value during the time that they are stored. The main risk comes with shrinkage. Shrinkage is when products are ‘lost’ between the point of purchase and the point of sale. This can occur for a variety of reasons including damage in transit or storage, fraud or theft. It can also occur as a result of perishable goods going past their sell by date.
Costs of Inventory Financing:
Inventory financing is the costs to the business by investments made to the inventory. It can include interest paid on working capital and financing accounts receivable.
Cost of Opportunity of Inventory Funds:
In a nutshell, if the money invested into inventory funds was invested elsewhere, what return could you potentially receive? Think treasuries, mutual funds etc.
Let’s face it, no business likes a shortage and these costs are incurred by not being able to make demand from stock. There can be a number of different elements to shortage costs and these can include:
Disruption of Production:
Some businesses produce as well as sell their products. If you are no longer selling an item you produced, you could potentially have costly factory overheads and idle workers to continue paying. You may even be forced to make redundancies to reduce these costs.
In order to try and satisfy customer demand, you may need to source an item quickly which could cost you substantially more.
Cost of Loss of Customers:
Shortages lead to cancellation of orders, which in turn leads to dissatisfied customers. Too many of these will affect your sales figures and ultimately, your profit.
We hope that you have found this blog to be a useful guide to understanding just how much your inventory is costing your business.