The Cost of Dead Inventory
Every Business man knows dead inventory is a big trouble. They knows dead inventory would increase the costs and reduce the profits. Followed is the details of the increasing cost of dead inventory.
The first one is well know: warehouse cost, include all costs related to personnel, rent, property taxes, building maintenance, electricity and other general utilities. Warehouse personnel are paid by the hour so every minute spent handling, counting, moving, maintaining or ultimately discarding stock adds to the cost. Shifting dead inventory out of a selling area or from prime warehouse real estate to the “back” of the warehouse will cost money in terms of labor needed to handle and also to keep product in a good and “saleable” condition. If 20-30 percent of your warehouse space is storing dead or slow-moving inventory, you might need to rent additional space to have room for the faster-moving and cash producing items. Lack of available space for new product lines, new machinery, or expanded office space may cause a company to expand or relocate its facility unnecessarily. Buying or leasing warehouse space only to fill it with dead inventory is a waste of money. Warehouses incur equipment expenses to load and unload stock as well as transport materials. Typically, fork lifts, pallet trucks, tow motors and ladders are needed as well as racks and shelves for storage and even pallets and skids for larger parts. And there are expenses associated with maintaining all of this equipment.
The second one is administrative cost. Paying employees to “fix” the inventory problems, as well as management time spent on solving inventory issues, is very costly. Employees paid for tactical, rather than strategic, management issues is wasteful. Hopefully, your staff is making up for this by optimizing systems and procedures, such as leveraging multi location activity to reduce cost of inventory.
The third one is opportunity cost. Opportunity Cost is a term often discussed in economics. The “opportunity cost” of a resource is the value of the next-highest-valued alternative use of that resource. As an example, if you spend time and money going to a movie, you cannot spend that time at home reading a good book, and you cannot spend the money on something important like chocolate! Related to dead inventory, when you’ve spent money on a “dead inventory” item, that is money that can’t be used to procure an item that will sell and gain profit.
The fourth one includes cost of borrowing money, cost of insurance, cost of discounts. Cost of borrowing money: To sustain an adequate inventory level, businesses sometimes must borrow money. Be sure to consider the cost of borrowing as an additional cost; Cost of insurance: insurance on the inventory is a substantial additional expense. Also, typically, there’s loss to be considered from pilferage, shrinkage and obsolescence. In resell businesses, carrying excessive inventory may lead to higher finance fees and insurance premiums; Cost of discounts: when these are obsolete products, they must often be sold at a huge discount or even scrapped. This is a cost that is often hidden or completely ignored.