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Inventory costs: how do you keep them low?

Nov 25, 2021

“How can I, as a company, control my dead stock as much as possible?” This is a question that concerns…
“How can I, as a company, control my dead stock as much as possible?” This is a question that concerns many entrepreneurs and wholesalers. It sounds like a great idea to buy the same products in bulk for an extra discount, right? The danger of this is buying too much inventory, which can be difficult to sell in the long run. Another cause of dead stock is your purchasing focus is placed on the wrong products. Extra inventory leads to more inventory costs. As a result, there’s a good chance that you’ll have little liquidity left over for things such as marketing or market research. Whichever way you look at it, you will always have inventory costs. This blog post will explain what inventory costs are, how you can calculate them, and tips on how to keep inventory costs low.

How do inventory costs arise?

Keeping stock costs money, since an investment to not only buy extra goods, but also to store them. Think of stock financing, as well as the transportation to get stock from the supplier to your warehouse. These costs can be classified under the three inventory costs: interest, space and risk. By properly mapping out these costs, you can ensure that your goods have a healthy stock value, and know whether or not you have unnecessary liquidity in your stock. Keep on reading to learn what inventory costs consist of:
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Interest

Stock is also seen as an investment. To be able to purchase new stock, you can either take out a loan or invest with equity. If you choose to take out a loan, interest must be paid on the borrowed amount. These expenses are also referred to as interest costs. But even if you buy stock from your own capital, you miss out on yield. After all, the money that’s tied up in this could also be spent on other business activities that generate revenue. As long as you don’t sell invested stock, it doesn’t bring any returns.

Room

As soon as new goods have been delivered, they must be stored in the warehouse. Costs are also charged for the storage of goods, such as renting a warehouse, energy costs, costs for the storage racks such as maintenance and depreciation, and transport costs. The latter refers to the transport of goods from the supplier to your warehouse. Space costs often also depend on the type of product, which may vary in size. If you buy larger products, this means you also need more space in your warehouse. Expanding your warehouse also costs money.

Risk

Does stock remain in your warehouse for too long? This means there’s a chance that your products will become obsolete. If you have non-perishable goods, they can also deteriorate slowly, which means that products are no longer salable. Goods can also discolour, dry out or wear out, and your customers will definitely not be satisfied if you’re offering them subpar-quality products. In addition, products can be at risk if they have water and/or fire damage, which will add more insurance costs. Another risk is that the purchase price of goods will fall. Competitors can take advantage of this by strategically buying and selling these products for an even cheaper price. Of course, you don’t want to be left behind in this, so you’ll be forced to discount your products as well. This is poor turnover for your shop, as you’ll be spending more money than you get.
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Why is inventory cost insight important?

If you want to optimize stock, it’s important to map out the current flow of goods. This forms the basis so you can calculate how much it costs to get and store stock. If you don’t have a good insight into your inventory costs, it becomes more difficult to determine which costs can be reduced first. For example, more than 70% of turnover is determined by purchasing. This variable is largely determined by supplier management. By negotiating delivery terms with suppliers, you can maintain a better grip on interest costs. Understanding costs also ensures that you have a better understanding of how to manage capital. For example, you can cut certain inventory costs to invest money in marketing or product development. By gaining insight into inventory costs, you ensure that you can prioritize the right costs in order to achieve more profit with products that better match customer demand.

How do you map out inventory costs?

Inventory costs consist of various components, depending on the type of product and whether associated costs change. For example, you may need to upgrade your warehouse because you’ve successfully sold many products and need to expand your operation. This means that inventory costs are generally variable. Inventory costs are largely expressed as a percentage of inventory value. To gain insight into the average inventory costs, you count all the costs that fall under interest, risk and space. For interest costs, you can use the following formula:
½ x opening stock + intermediate stock + ½ x closing stock / number of intermediate stocks + 1.

How can you reduce inventory costs?

Once you have an overview of your total inventory costs, you can determine how you can get even more control by reducing unnecessary inventory costs. Here are a number of tips you can use.
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Tip 1. Use inventory optimization software

Striking the right balance between too much and too little stock can be a challenge if you don’t have the right data. Stock optimisation software ensures that you receive purchasing advice based on data from different source systems. This reduces the chance of overstock and dead stock, which means that you lose less unnecessary costs.

Tip 2. Use inventory management methods

Want to create even more overview in selling stock? Make use of inventory management methods. These methods allow you to prioritize products that need to be sold first, ensuring that stock management is even more efficient.

Tip 3. Improve internal and external processes

Analyzing the flow of goods also ensures that you can improve processes. This way, you can keep a grip on space costs by tactically dividing your warehouse on the basis of runners and soft runners. In turn, this saves on purchasing warehouse inventory and deploying staff.

Tip 4. Ensure better cooperation with your suppliers

A good relationship with suppliers is important for building trust in each other. By conducting good supplier management you ensure that you get maximum value from your partnerships. Good delivery reliability ensures that you avoid selling no. You can keep interest costs low in the long term by making agreements about payment terms and keep your customers happy so that they continue to order from you more often.

Tip 5. Monitor your delivery times and stock positions

To calculate optimal stock levels, take into account delivery times to replenish your stock. When you respond to this, you have to work less with safety stocks. Having a buffer stock is nice, but it entails costs and risks. By purchasing in a timely manner on the basis of real-time data, you can also cut out unnecessary costs.

Tip 6: Also steer on your soft runners

Sometimes, you may buy too much from suppliers. There is also a chance that these are products that will not run in the long run, resulting in dead stock. Combine products that don’t sell well with products that are popular. Through marketing campaigns, you can ensure that products that are not running well become more attractive as additional sale items.

Reducing inventory costs means that you have more capital to spend on growing your business. By looking closely at your inventory costs, you know where you can cut costs. You will also keep your stock in balance and ensure that you do not incur unnecessary costs.
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