Any business that is retail based needs an inventory. An inventory is the aggregate total of all the products held by a company to be used for customer sales. As with all products, there are costs associated with inventory. These costs can be broken down into the following categories:
Ordering Costs — These are the costs associated with ordering and purchasing products for your inventory. There’s not a lot that is complicated about ordering costs. These fall into the category of costs that the business owners expect. The only cost that they may not foresee here is transport and delivery costs. This however is often borne by the supplier.
Carrying Costs — These are the costs incurred from simply holding your inventory. These are often costs that a business owner doesn’t foresee. They include:
- Capital Cost
- Obsolescence Costs — when a product is no longer selling and you need to abandon the product at a financial loss.
- Depreciation Costs — Products often depreciate in value over time. Sometime competitors can sell products cheaper and the only way to guarantee you can sell the items is to meet your competitors’ price. This results in an added unforeseen cost.
- Insurance Costs — This is the personal property insurance premium cost.
- Taxes on inventory.
- Storage and Handling Costs — If you need to hire somebody to hold inventory or to arrange it, stack it and organize it, which will incur further costs.
Out of Stock Costs — This is the loss that will come from missed sales opportunities due to not having stock on hand. It includes:
- Delay in production
- Lost sales to customers
- Damaged reputation
A lot of these costs can be protected against. A simple inventory management system can ensure that a lot of these costs are either eliminated or significantly reduced. Cloud-based inventory forecasting software and online inventory system allow companies to cut carrying costs to only those costs that are necessary. Out of stock costs will also be reduced as these systems stop stock levels from getting too low.