Business leaders tend to be laser-focused on revenue growth, and understandably so. But that fixation could result in overlooking less-obvious costs. And those stealthy expenses may dent profitability. One such under-the-radar outlay is inventory carrying costs, the expenses that come with holding inventory until it’s sold.
Inventory carrying costs are among the top inventory management challenges companies deal with. These expenses arise from keeping products shelved at a warehouse, distribution center or store and include storage, labor, transportation, handling, insurance, taxes, item replacement, shrinkage and depreciation.
Inventory carrying costs often total about one quarter of the inventory’s total value.
There are a number of factors that contribute to higher inventory carrying costs. They include:
Excessive safety stock. Changes in market demand and instability in the supply chain have pushed many businesses to consider a just-in-case inventory strategy, in which businesses hold large amounts of stock to ensure they do not lose sales due to out of stocks. But that results in increased carrying costs, which are added to a products cost-of-goods sold (COGS) and have a negative impact on profitability.
Slow-moving inventory. The Pareto principle says 80% of sales come from 20% of products. That means the other 80% of products are good sellers, average sellers and slow-moving items. Regularly reviewing product performance of all products, across all locations and selling channels, and having a contingency plan to unload slow-moving inventory, is key to good inventory health.
Inadequate tools for inventory management and planning. At the most fundamental level, relying on spreadsheets and manual processes to manage inventory creates inaccuracies, which can lead to overbuying and excessive carrying costs. For businesses that sell through multiple channels or store inventory in multiple locations, managing inventory manually becomes even more complex. Businesses without the ability to see and access inventory across all locations are forced to hold safety stock in each location, which drastically increases overall inventory levels — and carrying costs.
Poor forecasting. Without the ability to look at historical sales, seasonality and promotional sales, forecasting efforts are nearly impossible to manage manually, especially as the business continues to grow. If a company uses flawed data, it will purchase inventory that does not sell through as expected, resulting in excess inventory that’s consuming valuable space and tying up cash that would’ve been better spent elsewhere.
Flawed inventory and order management processes. A business’s inability to see inventory levels across all locations and fulfill orders from locations that have inventory in stock dramatically affects overall inventory optimization, and as a result carrying costs.
Carrying costs themselves are a symptom, but they aren’t the problem. To avoid excess carrying costs, you must go further into your business processes and understand where things went wrong, whether it’s poor forecasting or inadequate inventory visibility, or both.
NetSuite’s centralized platform marries inventory management and core ERP processes, which is a critical step in getting holding costs under control, because it enables better forecasting and delivers the real-time visibility every product-based business needs to make intelligent inventory decisions.
