Holding Cost of Inventory
The holding cost of inventory is directly affected by a business’ ability to optimize inventory quantities. If purchase orders exceed the rate of demand, you can end up with more inventory than storage space. Small businesses and startups may not face this issue until their businesses begin to grow and they can no longer keep product in a home garage or shed.
Depending on your industry, overages come with varying challenges:
- Insufficient warehouse space may necessitate the acquisition of additional storage space, incurring additional costs that lower profitability.
- Perishable products could spoil and therefore become waste
- Lack of space could cause crowded products to become damaged.
- Seasonal or trendy items could become obsolete.
- Products can depreciate.
- Items requiring climate control are usually more expensive to store.
There are several different ways businesses handle unsold inventory:
- Offer distributors and wholesalers a volume discount to move more product.
- Alter marketing methods to promote product overages.
- Offer customers sale prices through ecommerce platforms.
Inventory holding costs include the cost of unsold product, both suitable for sale and damaged, plus overhead costs like storage, labor, insurance, maintenance, etc. These costs make up a part of the total inventory management costs; other costs include shipping, assets, etc.
How to Find Inventory Holding Costs
Businesses tend to calculate their inventory holding costs as a percentage of the total inventory cost. As indicated above, adding the cost of all products, waste, and warehouse overhead divided by the total inventory cost gives you the inventory holding rate. Storage units and fulfillment centers can also play a role in providing additional storage when needed.
Calculate inventory holding costs:
Total Cost Products + Waste + Warehouse Overhead/ Total Inventory Cost
How to Minimize Holding Costs of Inventory
The key to minimizing the costs of overages is doing a better job of optimizing inventory levels. A great way to manage inventory levels automatically is using SOS Inventory to manage your inventory. SOS Inventory will track the cost of goods and overhead at every stage so you can maximize profits by setting your order levels to meet demand.
When you have enough extra inventory to meet anticipated rises in demand without carrying so much as to incur excessive storage costs and waste, then you have the ideal balance to increase profitability and build your business. Getting caught short on inventory will cost you sales, and that’s an undesirable that can also end in customer dissatisfaction.
SOS Inventory’s extensive reporting features allow you to drill down to the fine details for any product, giving you greater insight for future purchasing habits and decisions about where to invest cash flow.
If you want a comprehensive software that will help you to aggressively manage the holding cost of inventory, look no further than SOS Inventory. Your business will be more profitable, streamline processes, lower labor costs, and increase ROI. Why not get started today?