Understanding the costs of holding inventory is crucial for effective inventory management. 

While it might seem like a good idea to sell every last item in your inventory, there comes a time when it costs more to keep unsold stock than what you’ll earn by selling it.

Holding Costs refers to the costs associated with storing inventory that remains unsold. This includes the price of goods damaged or spoiled, as well as that of storage space, labour, and insurance. All these costs can impact a company’s profitability and efficiency. 

The key costs associated with holding inventory are:

Carrying Costs:

• Storage Costs: This includes expenses related to renting or owning warehouse space, utilities, insurance and security.
• Handling Costs: These expenses cover labour, equipment, and supplies needed for receiving, inspecting and moving inventory.
• Shrinkage and Obsolescence: Inventory can get damaged, spoiled, or become obsolete over time, leading to financial losses.

Opportunity Costs:

• Capital Tie-Up: Money invested in inventory is not available for other investments, potentially missing out on more profitable opportunities.
• Interest Costs: If a company borrows money to finance inventory, it incurs interest expenses.

Insurance Costs:

• To protect against loss due to theft, fire, or damage, businesses often need to pay insurance premiums on their inventory.

Deterioration Costs:

• Certain items may deteriorate over time, such as perishable goods or items with a limited shelf life, leading to loss.

Ordering and Replenishment Costs:

• These costs include expenses related to placing orders, tracking inventory levels, and managing supplier relationships. Reducing the frequency of orders can lead to economies of scale, but may increase holding costs.

Carrying Cost of Money:

• This cost represents the opportunity cost of using capital to hold inventory rather than investing it elsewhere. It is often calculated as a percentage of the inventory’s value.

Storage Space Utilisation:

• Holding excessive inventory can lead to inefficient use of storage space and may require expansion or additional facilities.

Stockouts and Overstocking Costs:

• Holding too little inventory can result in stockouts, leading to lost sales and potential customer dissatisfaction.
• Holding too much inventory ties up capital and can result in discounting or disposing of excess goods.

Cost of Quality Control:

• Regular inspections and quality control measures are necessary to ensure that inventory remains in usable condition.

Reducing Holding Costs

To minimise the expenses linked to holding inventory, organisations should strive for swift inventory turnover by expediting sales and prompt payment collection. The objective is to boost sales and curtail the necessary inventory quantity, thereby enhancing the turnover ratio.

Organisations should calculate a reorder point, which is the inventory level that necessitates restocking from suppliers. This method allows for the fulfilment of customer orders without suffering excessive inventory storage costs. The reorder point takes into account the lead time for supplier orders as well as the products’ weekly or monthly sales volume.

Further strategies to reduce holding costs include reducing the warehouse footprint (the network of warehouses a company has at its disposal to store inventory) and using efficient handling processes (such as barcode and RFID scanning rather than manual tracking).

An alternative method to reduce holding costs, and one that threatens the traditional supply chain, is Zero Inventory Management. It has been adopted by several big companies around the world thanks to advances in digital stock management technology. By holding zero inventory it reduces, if not completely eliminates, the traditional costs of holding stock.

Utilising Unleashed Inventory Management

Organisations should leverage inventory management software, such as Unleashed Inventory Management, to mitigate holding costs by ensuring real-time visibility into inventory levels, thereby preventing overstocking and understocking issues. 

This technology streamlines inventory control, enhances accuracy, and facilitates data-driven decision-making to optimise supply chain efficiency and minimise financial burdens associated with excessive inventory. Unleashed can lead to cost savings, improved cash flow, and better customer service.

• With Unleashed you can discover which products in your warehouses aren’t moving, or find the products that are most at risk of moving too slowly, or which are entering the end of their product life cycle.
• Real-time visibility with Unleashed can improve demand forecasting. Demand forecasting uses supply chain information to plan the levels of stock needed to meet expected demand which gives you greater inventory control.
• Unleashed provides a reorder report — your go-to for reviewing your inventory, stock availability, what has been allocated for an order and what is currently being purchased.
• To assist in the calculations of your inventory formulas, visit Unleashed’s Inventory formulas & live inventory calculators page. It is a resource for busy product companies, and aids in the calculation of safety stock, reorder points, the EOQ equation, the inventory turnover formula & more.
  

Incorporating Unleashed into your inventory management strategy can help you optimise your inventory levels, reduce carrying costs and improve overall operational efficiency. 

Radical Cloud Solutions are proud implementation partners of Unleashed. Get in touch to find out more about this powerful inventory management solution.