Methods You Can Follow to Reduce Your Cost of Inventory

February 15th 2019 at 10:16am Published by sharpshooteradmin

Holding inventory for a certain period of time has many costs associated with it, which can make any business go bust. As a business owner you need to realize the cost of holding on to inventory and should make sure that you try your best to limit it.

What is the Cost of Holding on to Inventory?

Before we go on to explain the ways you can reduce your cost of inventory, we will first look at what exactly makes up the cost of holding inventory. If you’re new to business or haven’t had formal education in business management, then this explanation will help clear the concept to you:

The cost of inventory is basically the cost that comes with ordering, handling and holding inventory for a particular period of time. When you calculate this cost properly, you can add it to your cost of goods sold, to make sure that you are doing a good job at computing the actual cost of goods you have sold.

Inventory costs could include:

  • Ordering costs for transporting and bringing inventory to your warehouse
  • Holding cost for holding inventory in a warehouse or any space. Obsolescence will also be computed as a cost here
  • Administrative costs for overlooking inventory and making sure that wastages are limited

If you feel that your cost of inventory is currently high, then you can follow the tips below for more:

Organize Your Warehouse

Warehouses serve as an easy and manageable way of keeping your storage area organized and making sure that inventory is managed well. However, poor management in the warehouse can be a leading reason behind inventory costs.

If you keep stacking items inside the warehouse without considering which one came first and the order of their purchase, then you will have a disorganized inventory setup. If whatever you are buying has a perishable life, then you will also have to suffer from numerous wastages. It is good to keep a track of time on every item coming into your warehouse.

Invest in Automation

Automatic inventory management software processes can make the entire process a lot easier. You can track and keep an eye on your inventory regardless of the stage that it is in. Moreover, you can also order more inventory when the need be and can work on it for the best results possible. The system monitors your daily activity and can also help with sales. You can take small business funding for acquiring such a system if you don’t have the right reserves with you.

Keep Inventory Low

As a small business looking to achieve efficiency, you should follow the principles of inventory laid down by lean management. Keeping high inventory level is a recipe for inefficiency, as you will never be able to check the efficiency of your products and how they are performing in relation to inventory management.