The True Cost of Carrying Costs

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Managing your inventory can be an expensive business. Every year, businesses spend 20-30 percent of the price of purchasing stock on inventory management. Optimizing inventory is crucial to lowering your carrying costs.

About carrying costs

Carrying costs are the costs involved in managing your inventory, such as taxes, employee costs, insurance, storage costs, replacement costs, and capital costs. “Carrying cost of inventory, or carry cost, often refers to a certain percentage of the inventory value, which represents the cost a business incurs over a certain period of time to hold and store its inventory,” says Investopedia. Many new businesses forget to factor in the costs of carrying inventory. Understanding the costs can help improve your financial numbers for the future.

How carrying costs impact your bottom line

The higher your costs, the less profit you make. You might sell thousands of products from your warehouse, but if you have high insurance and rent costs, you’ll be eating into your bottom line. “In order to optimize a company’s supply chain, a company needs to understand the total cost of its supply chain,” says The Balance Small Business. “Inventory carrying costs are a large part of that total cost.”

Optimizing carrying costs

There are many ways to optimize carrying costs and save money:

  • Organize your warehouse: Organizing your warehouse space could save money on storage, one of the highest carrying costs for inventory management. An organized, clean warehouse space provides you and your employees with quicker access to products and enables you to carry out stock level checks more efficiently.
  • Use the right software: Good software lets you organize your inventory and save money on human labor. The best programs automate many of the tasks associated with inventory management so you can spend time on other areas of your business. Statistical forecasting software, for example, provides you with valuable insights into your business and makes accurate predictions about your supply chain.
  • Segment your inventory: Segmenting your inventory makes it easier to find and track products, which saves time (and money) on administrative tasks. ABC classification, for example, lets you rank your products by importance. You can then focus your energy on high-priority items that provide your business with the most value.
  • Move to a new location: The average rent for warehouse space in the United States is $5.50 per square foot. If you have a large warehouse, rent could be costing you tens of thousands of dollars a year. Moving to a new location might sound like a hassle (you’ll have to move all of your inventory, too) but it could provide you with a return on your investment and help you reduce carrying costs.
  • Use an insurance comparison website: If you haven’t negotiated your insurance policy with your provider for a while, now’s a good time to do it. You could save thousands of dollars a year. Alternatively, use an insurance comparison website. These sites let you compare different insurance policies in one place, so you can find the cheapest deals.

If your inventory is worth $300,000, you could be paying $30,000-60,000 every year in carrying costs. Although you need to pay for essentials like storage and insurance, you can reduce the costs by following the tips above.