What is paid to the supplier is only part of the true cost of holding stock. Businesses that purchase stock, both for production and direct re-sale, will be familiar with the term ‘carrying cost’, which is the sum of:
- Purchasing the stock
- Damage and loss
Purchasing the Stock
There are many hidden costs with purchasing stock. The more obvious ones are missing out on economies of scale by not ordering in bulk or far enough in advance. The opposite, which can have an equally negative impact is purchasing more stock than needed to avail of a special rate.
Less obvious costs may include finance charges and opportunity costs. This is either the interest charged on finance borrowed to purchase the stock or the investment opportunities missed because money is tied up in under-performing inventory.
Stock needs a shelf to sit on and it doesn’t get there by itself. Whether you own or lease a premises, mortgage/rent, insurance, electricity, heating and security are just some of the typical costs you are guaranteed to have, as well as furnishings and equipment for moving stock. If your product requires specialist storage, such as refrigeration, the cost may be greater.
Warehousing costs increase with area size, so it makes sense to only store what is needed for the foreseeable future.
Handling and Delivery
A poor warehouse layout reduces productivity. Identifying fast moving stock and storing it at easily accessible locations will reduce unnecessary internal transport, people movement and repetitive tasks.
Likewise, inefficient use of warehouse space and shelving may result in a bigger area being needed.
Damage and Loss
The longer that stock is held, the greater the risk of depreciation or becoming obsolete. Accurate calculation when ordering is vital for reducing the risk of deterioration of stock.
For accountancy purposes, ‘carrying cost’ is broadly accepted as being fixed at a percentage of stock value, that nothing can be done about. However, smarter stock management enables businesses to reduce these costs and significantly impact the bottom line.
Implementing a stock management process eliminates excessive, obsolete, or underperforming stock that is wasting money. It also ensures that in-demand items are sufficiently stocked so that sales can be completed promptly and cost effectively.
Download our ebook to learn some of the best practices for achieving purchasing efficiencies through better stock management, involving all relevant departments in the process.