What is the true cost of poorly optimized inventory management?

Businesses spend an average of 25% to 35% of their budget on inventory costs. This means that poorly optimized inventory management can get quite costly.

Typically, high inventory management costs come from buying either too much or too little products.

In this article, we discuss four costs of poorly optimized inventory management:

Higher carrying costs
Increased carrying costs from spare parts inventory, insurance, and taxes
Losses from overbuying
Missing items and stockouts

Inventory management

Higher carrying costs

If a facility manager often overspends and poorly manages inventory, then they might face extra carrying costs. Carrying costs are defined as how much it costs to keep inventory on hand, and they may come in the form of storage space, insurance, operational costs, salaries, and even taxes.

Carrying costs account for about 25% of a given company’s total inventory costs.
That percentage can climb to 40% in some cases.

Increased carrying costs from spare parts inventory, insurance, and taxes

MRO inventory frequently includes spare parts. While it’s good to have extra parts on hand, those can increase inventory carrying costs. As such, it’s important to streamline your spare parts inventory.

MRO inventory typically turns over less than once per year.
That extra inventory lying around results in recurring costs, including about 5% of its total value in insurance costs.
Some states include taxes on existing business inventory. For instance, the state of Mississippi brought in about $168 million from inventory taxes back in 2010.

Losses from overbuying

Overbuying on inventory leads to losses, both in terms of carrying costs as well as markdowns. In order to eliminate excess inventory, markdowns are frequently necessary for retailers.

On average, non-grocery retailers only sell about 60% of their stock at full price.
Markdowns account for about $300 billion in lost revenue in the United States.
Roughly half of all retailers cite inventory misjudgments as the cause of these losses.

Missing items and stockouts

Poor MRO inventory management leads to increased downtime costs in that parts either run out or simply become difficult to find.

Unplanned downtime could cost up to $260,000 per hour.
Delays resulting from an item being out of stock could also lead to lost customers.

How can I optimize my inventory management?

In one of the studies we referenced, about 86% of retailers knew specific ways in which advanced analytics could help them cut inventory management costs.

Ultimately, it all comes down to knowing exactly how much of each item you need, how much of it you currently have, and how quickly you can find it. IoT solutions and inventory management software can both help you keep on top of those items.

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