Thursday, March 3, 2011

The Cost of Excess and Slow Moving Inventory

How much is Excess and Slow Moving Inventory costing
your business?

Inventory is a huge investment for most companies and in a recession, holding inventory can become a significant financial burden. Inventory that is not being utilized is creating a drain on your cash flow and ultimately, a negative impact on your corporate bottom line.

What is the real cost of holding onto inventory? Is it 20%, 30%, 40% or more?? Recent studies indicate that in many companies the carrying cost is no more than a guess, or a number given to them by accountants or other sources.

So how does excess or slow moving inventory cost money?

Interest is paid on borrowed money. When inventory doesn't sell, you are incurring more interest charges.

Jurisdictions tax manufacturers’ inventory

Insurance premiums cover replacement costs of inventory on hand

Financial reserve set aside to cover losses, write-offs, and shrinkage

Storage Space
Operational and Maintenance costs are incurred every day. If your warehouse is full of slow moving inventory, what will you do when you run out of space? Build or rent more warehouse space to accommodate more inventory? Your slow moving inventory is taking up space and eating up money that could be used on inventory that could be making you money.

Capital Equipment
The cost of supporting hardware should also be considered: forklifts, scales, bins, racks, and automated storage and retrieval systems.

Is your inventory depreciating as it sits there month after month?

Time and Personnel
Include Inventory and Warehouse managers, stock keepers, material handlers, cycle counters, planners,and controllers.

How much time are your company's employees spending on your excess inventory? How many man hours are spent looking at the issue, going to meetings about it, trying to figure out the most profitable way to deal with this inventory?

The bottom line is when you factor in the real costs, the maintenance of excess and slow moving inventory is not worth the negative effect on the profitability of any company. Inventory needs to be moving. The slower it moves, the less money you earn in revenue AND the more money and time you lose from all of these other negative consequences of holding this inventory.

In our next article I will discuss a solution for this excess and slow moving inventory that offers a way to eliminate ownership costs and free up warehouse space while still retaining inventory availability for long
term product support.
It is called The Inventory Bank.