For retailers, inventory represents the largest portion of their assets. This is why, if you’re a retailer, you need to understand the true costs of your inventory. Reducing costs affecting inventory can increase cash flow and profitability. One way to increase margins is to reduce carrying costs (sometimes referred to as holding costs).
What Are Carrying Costs?
The carrying cost of inventory describes multiple factors affecting inventory in storage, such as:
- Depreciation
- Insurance
- Warehouse space
- Cost of replacement
- Employees
- Taxes
- Delivery
Combined, these costs can be calculated as a percentage of total inventory, which give you a better understanding of your total cost of ownership.
Lowering Carrying Costs
In today’s highly competitive environment, retailers can’t afford to lose control of their daily expenses. They need to create a cost-containment plan through inventory management that initiates a strategic reduction in errors and avoids future mishaps that may substantially affect profits. The plan also sets into motion continuous improvements—to refine the management of inventory.
How can you reduce your carrying costs?
There are many approaches to reducing costs. The list below has four cost-reduction methods that describe simple strategies to cost containment that are easy to implement.
1. Automated Inventory Control
Your inventory control system should have low-stock alerts, automated purchase orders (POs) and dead stock reports. Low-stock alerts are triggered when products reach safety stock levels that are in place to create a buffer from running out of popular items. In robust point of sale and inventory control systems, these alerts can also trigger an automated PO that is sent directly to the vendor. An automated system eliminates costly shortages and human errors.
2. Obsolete Inventory
Items that don’t sell are taking up space on your shelves where newer, more popular items can be displayed. Retailers need to be aware of product life cycles and shifts in the market. When items are no longer in demand, they become obsolete. The standard timeframe for an item to be considered obsolete is 12 months. There are some great ways to get rid of dead stock, such as bundling it with popular items, returning it to the supplier, or donating it to local charities.
3. Purchasing Frequency
Increasing the frequency of your purchases means fewer items in the warehouse. However, suppliers with minimum order quantities can complicate this strategy. These mandatory minimums create headaches for small retailers. Therefore, forecasting customer demand is crucial to understanding what you need to purchase. One way to forecast demand is through sales reports. If your inventory management system doesn’t provide sales reports, then you may be missing important data to adjust your POs. This can result in missed opportunities or overstocking items.
4. Reduced Supplier Lead Time
Another opportunity to reduce stock levels is through a shorter lead time with your suppliers. Less time for deliveries means fewer items on the shelves, which equates to lower carrying costs. This may require a good working relationship with your supplier. You may need to compromise in some areas to gain more in others. Collaboration is the key to achieve a beneficial relationship.
Create a Plan and Stick to It.
Getting organized is the best way to reduce your expenses. It is also a great way to create value for you customers. Inventory management has a major impact on your customer’s experience. One negative experience from out-of-stock items can lose future business.