The Costs of Carrying Excess Inventory

Almost everybody in the retail and wholesale business knows that carrying inventory costs money. But how much does it really cost? And what contributes to these costs? One estimate I came across recently put the number at 25% per year. That is, if you’ve got $100,000 worth of inventory sitting somewhere, then you’re going to spend 25K keeping that inventory in saleable condition. That’s a lot of money – especially if the inventory is not going to sell. What contributes to these costs? Here are just a few of the factors contributing to the “carrying costs” for your inventory: Opportunity Costs: Inventory is capital. What are you losing by not investing that capital somewhere else – such as infrastructure improvements or other product? Shrinkage and Degradation: It’s inevitable as inventory sits on shelves or in a warehouse that it will degrade (or even disappear!) through a variety of factors including environmental damage (water, heat, etc.), loss, and theft. Unfortunately, combating these issues (improving facilities and security, for example) also costs money. Insurance: Depending on the type of inventory, if you keep insurance on it, that can get pretty expensive. Obsolescence: This is a big one. Consumer tastes change. Technology changes. And, remember, prices on things don’t always rise. Think about the consumer electronics sector for example. What did a DVD player cost when they first came out? What do they cost now? In many industries there is constant downward pressure on price. Space: Again, this one may seem a little hard to get an exact figure on…but if you factor in everything that goes into your space including costs for rental or ownership, power, heat, light, humidity and temperature control, etc. You may not see this bill all in one place, but you know it is adding up every day your inventory sits. Remember, these are all costs for inventory that isn’t making you any money!

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