Are you paying close enough attention to your hidden inventory management costs?
Most businesses are very aware of how much it costs to buy their stock, but are they fully aware of the additional hidden costs that are associated with managing their inventory?
When businesses are looking at their inventory management costs, it is important to be aware of the additional costs that can sometimes be overlooked.
These costs are usually displayed as a percentage and are related to the value of the total stock. In order to maintain accurate figures on inventory management cost, this calculation needs to be an important part of an inventory management system. If these additional costs are not considered, the profitability of the business can be affected. An important consideration I would say!
A reduction in profits can lead to a rise in prices. The most obvious consequence being a loss of customers who may start to look for a cheaper alternative in a competitor. Something that most businesses would want to avoid at all costs.
It is therefore very important that when looking at your company’s inventory management processes, that these additional costs are managed correctly. An important skill for operations managers is being able to identify aspects of the supply chain where cost-saving could take place. Processes can then be put in place to ensure that a decision made at one point in the chain does not inadvertently increase costs at another point.
Inventory Management Costs
What are these hidden inventory costs then and how can we manage them correctly?
The first costs to consider are the Carrying Costs. These include all costs associated with storage facilities, insurance, and staffing costs. As you would expect, these costs are directly related to the amount of stock that is being stored. A huge warehouse full of stock will always incur higher carrying costs than a small shop storage room!
It is also important to realize that the longer stock remains unsold, the risk increases of it becoming outdated, or even being made obsolete by a new and improved product. We have all been very excited when buying the latest gadget, only to find a new version is being released the following week. When this happens, the stock can lose its value overnight and companies can be stuck with warehouses full of items that they now need to sell off at a reduced price.
The second set of costs to consider are the Stockout Costs. These costs can occur when money is lost when a company is unable to fulfill an order due to a lack of stock. The resulting loss in consumer confidence and recommendations could be very detrimental to a company’s reputation. Reputation is everything, as they say. Even if your customer service, website, and facilities are excellent, if you can’t give the customer what they ordered, the sale will be lost. It can then be very difficult to reestablish trust with a customer once it has been lost.
The final costs are the Ordering Costs. These relate to the procurement process – basically, the costs involved in getting the stock from the business to the customer. These costs need to be carefully managed by procurement managers to maximize profitability. These managers will look at delivery costs, staffing costs and the size of orders. They will attempt to maintain the most efficient operational and financial process. Quite a job for those companies with huge distribution orders from all over the world.
What is the best way of managing these costs then I hear you say? Well, as in most complex processes, the best way forward is to implement best practice systems and guidelines which are easy to use and follow.
How can we Introduce Best Practice in Inventory Management?
In an increasingly competitive market, successful wholesale distribution needs to be managed in an efficient and smart way. The increased use of inventory management software means that universal best practice systems can be introduced and implemented, in the largest businesses with fulfillment sites all over the world.
These inventory management systems help to limit the amount of money being wasted during the procurement process. This is due to the fact that the amount of stock being sent out, is now directly linked to what has been ordered. This means limited wastage, and money not being spent on stock that is not needed.
This in turn, also reduces staffing costs and allows for much more accurate forecasting. A win-win situation, right? This is especially important for many industries that see peaks and troughs in demand at different times of the year.
An inventory management system gives you the real-time data and tools to manage your stock and maximize your profitability. In the fast-paced world of business, these systems are an invaluable tool to keep your business running smoothly and efficiently.
Talk to an expert to help you maximize your profitability and efficiency.