When companies budget for inventory, they consider the cost of the items along with related charges like shipping or tax. But the true cost of inventory includes many other aspects. These other issues may be easy to overlook, but understanding the true cost of inventory can help smaller companies keep costs down, invest wisely and improve the way they purchase, store and promote the inventory they have.
When a company sets out to purchase more inventory, they might compare prices between a few vendors, but their considerations rarely go any further. This may help them find the best price per unit, but it underestimates the real cost of this vital part of business. When thinking about the true cost of your inventory, there are several factors to keep in mind.
Financing – If your company uses financing to supplement its purchasing power, this should be factored in when considering more inventory. That includes interest rates and any fees associated with the loan or credit your company uses.
Opportunity – When an investment in inventory hits a certain dollar amount, it’s worthwhile to consider if there was a better way to use that money. Calculate how much your money could make in a bond or bank account and compare that against what you can reasonably expect in terms of return on this batch of inventory.
Insurance and Storage – Is this inventory going to require an increase in insurance for your premises? Even if an increase in insurance isn’t likely, how about the space it will take up in your warehouse. Calculate the cost per square foot in your warehouse or storage area and include it as a part of your ecommerce inventory management system so you know how much inventory costs as it waits to be shipped or moved to retail outlets.
Vendor Time – Working with vendors costs money if it requires staff members to deal with vendors who deliver late, ship only partial orders or have problems with consistent quality.
These factors can easily increase the true cost of any part of your inventory. Being able to calculate the true cost based on individual products or items that come from a single vendor can help you purchase more wisely. That also means your order processing, shipping and customer service operations can also be improved. That’s good for your bottom line and your company’s future.