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How Economic Order Quantity Can Lower Inventory Costs

Calculate Inventory Management Costs

Decisions are guided by feel or best guesses rather than strategy and data. To reduce the cost of capital, invest in forecasting that leads to smaller or more strategic purchases. Inventory risk includes shrinkage, depreciation and product obsolescence. Capital costs refer to all the money plus interest invested in your business inventory.

  • The company exhausts the stock with the earliest expiration date first.
  • Employee costsmainly consist of salaries or wages for warehouse employees who maintain the building, manage andaudit inventory, and fulfill orders.
  • Inventory Management Fundamentals of all inventory aspects and how best to maintain life system.
  • Below are 5 ways to limit inventory expenses to optimize your inventory performance.

Taxes, insurance and inventory management software are all examples of service costs. Carrying costs are among the top inventory management challenges companies deal with. Opportunity cost—the investment possibilities a company must decline because its resources are tied up in inventory—is also a factor. Inventory carrying costs, or “holding costs”, refer to all the expenses a business incurs to stock and hold inventory over a period.

How to Determine the Cost of Goods Available for Sale

Shrinkage is the loss of saleable product due to damage, theft, or errors in record keeping. Obsolescence is the loss of saleable products due to product expiration or retirement and is an issue for retailers carrying products with a short shelf life. Obsolescence goes down as a write-down or write-off and eats directly into a business’s bottom line.

Calculate Inventory Management Costs

Fluctuations in sales can leave you struggling to find a solution for optimizing inventory levels and fulfilling orders. In a situation like this, you might approach your warehouse management with a very simple strategy — keep your shelves full. This may seem like the best solution, but this tactic is counterintuitive and will force you to miss out on opportunity costs in the long run. Business owners understand the importance of maintaining accurate inventory records and the role these records play in inventory cost accounting. Find the right tool that can streamline accounting processes and provide visibility into inventory on-hand.

Neglecting to include inventory management when forecasting

Many companies will choose to insure their inventory, and the rates vary. It can go from some tenth of a percent to several percentage points depending on the risks of the product. You need to Calculate Inventory Management Costs add this gap to your stock rotation to calculate it in its entirety. So if your stock rotation is 70 days, for example, your total inventory to fund will be significantly higher, 100 days.

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