How to reduce inventory holding costs

Inventory storage

Understanding Inventory Storage Expenses

Inventory storage expenses, often referred to as inventory carrying costs, encompass the accumulation of all expenditures associated with storing unsold inventory. These expenses include warehouse fees, labor costs, administrative expenses, insurance premiums, transportation fees, handling charges, asset depreciation, taxes, inventory shrinkage, spoiled or damaged inventory, obsolescence, and opportunity costs.

Inventory, typically considered an asset, demands significant financial investment from businesses aiming to maximize profitability, thereby restricting available funds for operational endeavors. Calculating the cost of inventory storage involves determining a percentage of the total inventory value. This computation entails summing up all inventory-related costs, including storage fees, labor expenses, opportunity costs, depreciation, shrinkage, and obsolescence.

The average expense of inventory storage varies across industries and the types of products stocked. Generally, retail entities aim to maintain inventory storage costs at approximately 15–30% of their total inventory value.

Strategies to minimize inventory costs stand as crucial elements of supply chain management. Techniques to mitigate storage costs include expediting payment collection and accurately determining reorder points.

How to Assess Inventory Storage Expenses

Evaluating inventory storage expenses doesn't require statistical expertise. Here's a simplified guide:

1. Identify Direct Expenses: Begin by pinpointing direct expenses linked to inventory storage, such as warehouse fees, employee wages, inventory depreciation, and opportunity costs.

2. Compute Annual Inventory Value: Determine the total value of your annual inventory by summing up the value of all stocked products.

3. Account for Indirect Costs: Inventory storage expenses also comprise indirect costs like warehousing, insurance, labor, transportation, depreciation, inventory shrinkage, spoiled or damaged inventory, obsolescence, and opportunity costs.

4. Utilize the Inventory Storage Expense Formula: A more detailed approach involves using the inventory storage expense formula, which incorporates storage fees, labor expenses, opportunity costs, and depreciation expenses. Inventory Storage Expense = Total Inventory Storage Costs / Overall Inventory Value x 100.

5. Assess Profitability: Analyzing inventory storage expenses enables an assessment of potential profits. Understanding pricing can help avoid unnecessary costs and safeguard against business losses.

For example, consider a wholesale electronics retailer looking to evaluate its inventory storage costs. After tallying warehouse fees ($15,000), opportunity costs ($18,000), labor expenses ($5,000), shipping ($7,000), insurance ($3,000), and depreciation/shrinkage ($2,500), total inventory storage costs amount to $50,500. With an inventory value of $200,000, applying the annual inventory storage expense formula yields:

Inventory Storage Expense = ($15,000 + $18,000 + $5,000 + $7,000 + $3,000 + $2,500) / $200,000 x 100

Inventory Storage Expense: 25.25%

In this scenario, the retailer's inventory storage expense falls within the desired range. Typically, inventory storage expenses should constitute approximately 15–30% of the inventory's annual value. Consequently, exploring strategies to maintain or reduce inventory storage expenses becomes imperative.

Strategies to reduce inventory storage expenses

While assessing inventory storage expenses is straightforward, devising methods to minimize them necessitates effective strategies. Here are some approaches:

• Accurate Demand Projection:

Precise forecasting of demand serves as a cornerstone for reducing inventory storage expenses. Reliable forecasts facilitate optimal inventory procurement aligned with consumer demand, mitigating the risk of overstocking and consequent storage expense escalation.

• Inventory Planning Automation:

Leveraging technological solutions for inventory management and planning streamlines operations, providing automated insights into demand forecasting, reorder thresholds, safety stock levels, and optimal inventory quantities.

• Disposal of Excess Inventory:

Excess inventory, representing unsalable items, poses a significant challenge. Disposal methods include bundling with high-demand items, returning to suppliers, donations to charitable organizations, sales promotions, or liquidation.

• Efficient Storage Space Management:

Organized warehousing enhances inventory management efficacy, minimizing storage expenses by optimizing space utilization and improving inventory tracking accuracy.

Reducing inventory storage expenses through Augment Cloud

Utilizing inventory management tools to provide accurate forecasting, reliable ordering recommendations, and dependable data regarding inventory health stands as the best strategy for businesses to reduce inventory storage expenses.

With these tools, businesses gain access to real-time data on inventory levels, customer demand trends, and sales history, enabling informed decisions about inventory procurement. Advanced algorithms assist in avoiding overstocking or understocking products, maintaining optimal inventory levels, utilizing storage space efficiently, and reducing inventory storage expenses by ensuring only necessary inventory is stocked.

Automation features save time and eliminate errors, enabling businesses to focus on other critical aspects of their operations. Additionally, these tools provide insights like the last sold date, excess inventory units, and associated costs, aiding businesses in identifying stagnant inventory and inefficiencies for adjustment, thereby maximizing profitability.