Inventory represents the financial lifeblood of many businesses; simply put, if there is no stock to be sold, there is no business. So it’s crucial to understand inventory and all the costs that are associated with it. Inventory cost types can be broken down into five key categories:
- Ordering costs
- Holding costs
- Spoilage costs
- Inventory shrinkage costs
- Stockout costs
This article looks at the various types of inventory costs you can expect to find within each category.
1. Ordering cost
The purchase price (including goods and delivery)
What you pay for your goods is perhaps the most immediate cost that comes to mind when considering your inventory costs, and this figure should include any fees, taxes or delivery charges that come with the purchase.
Staff costs
The ordering costs also include wages for those in the buying department; this covers those who research the products and suppliers, negotiate the prices and sign off the purchase orders, as well as those who place the orders.
2. Stock holding cost
Stock holding cost, also known as carrying cost or holding cost, refers to the expenses associated with holding and storing inventory within a business. These costs are incurred as a result of maintaining a certain level of stock to meet customer demand.
Storage costs
One of the most obvious inventory costs is for the storage of your goods: the cost of your warehouse, or other storage premises. You can minimise storage costs by renting a smaller space and using the vertical space to its full potential.
Security costs – staff or security systems
Keeping your stock safe, while a good and sensible approach, costs money, whether that is for security staff, security systems or both. Security cameras and alarms are a good first step in helping to protect your stock.
The cost of protecting your inventory needs to be factored into the total cost of your inventory.
Staff costs
As well as the costs of security staff (and purchasing staff as mentioned above), you also need to account for the costs of your warehouse staff who unload, store, pick, pack, quality control and dispatch your goods.
Other holding costs
Your holding costs also include fees, taxes, insurance and other miscellaneous costs associated with maintaining your stock before it’s sold.
3. Spoilage cost
Perishing stock
Some goods have a finite lifecycle and will rot, deteriorate, spoil or simply become unusable after a certain point; examples of such goods include food and drinks, healthcare products, cosmetics and pharmaceutical products such as vaccines.
Obsolescence
With technology advancing at the rate it is, it’s becoming a real danger that technology may be out of date before you’ve had a chance to sell it. It’s important to only order in quantities that you know you can sell before the next model comes along, else you may be lumbered with outdated stock that you won’t get full price for.
Damage
Damage can refer to any cracks, tears, scratches, dents, water damage or fire damage that make products unsellable, or only saleable at a reduced price. Buying from reputable suppliers who provide proper packaging and handling during transit will reduce damaged goods, as will training your staff on how to correctly unload and store your stock.
4. Inventory shrinkage cost
Theft
While we touched on security costs above, the costs of insufficient security must also be considered. Theft is a risk for any stock-holding business and the threat can come from employees or third parties. Lost stock not only represents the loss of a sale but also the loss of the money used to buy the goods in the first place, so having stringent security measures in place is a good investment.
Supplier error or fraud
Shrinkage can also come from not receiving the correct amount of stock to begin with; whether this is done intentionally or accidentally, it affects your bottom line. Of course, if a particular supplier is regularly short-shipping you, you will likely cease trading with them and find a more reliable supplier. However, there are admin costs associated with chasing down the missing stock and potentially finding a new supplier.
5. Stockout cost
Revenue lost as a result of not having goods in stock
This may mean a customer places the rest of their order with you and asks to be notified when the unavailable product will be back in stock, it may mean they buy that product from another supplier or may mean they buy their entire shopping list from another supplier.
How to reduce inventory costs in your warehouse
Using a Warehouse Management System (WMS) can help improve efficiencies and reduce some of your inventory costs. It automatically tracks stock volumes, reducing room for manual error and producing reports and updates, letting you know what needs reordering and how sales trends of products.
Can Optima WS automatically reorder low-stock items?
A WMS also makes your warehouse staff more efficient by reducing put-away and pick time; this is done by creating optimum routes for your staff to follow through your warehouse.
For more information about how Optimiser WMS can help your warehouse reduce inventory costs, please get in touch with Optima Warehouse Solutions today.
