Investing in inventory management software can save your business money and increase your profits.
One way this happens is through the software’s ability to continually provide data for calculating your organization’s inventory carrying cost. Knowing your carrying cost is imperative.
Let’s first define carrying cost and how to calculate it…
Calculating Carrying Cost
Step 1: Add up the total cost of housing all of your inventory. That means adding up the sum total of all your expenses related to storing that data (all costs related to maintaining the physical warehouse and other inventory buildings). This is sometimes called the holding sum.
Step 2: Add up the total value of ALL of your currently stored inventory. In other words, determine the sum total of what your inventory is worth in dollars.
Step 3: Divide the cost of storing your inventory by the inventory’s value.
Step 4: Convert your answer from a decimal to a percentage (the number you got from dividing the cost of storing the goods by the value of the goods). This is done by simply moving the decimal two places to the right.
Shown as an equation:
(The Total Price of Storage) ÷ (The Total Inventory Value) = The Inventory Carrying Cost
If your total inventory value is $1,000,000.00 , and the cost of storing the inventory is $250,000.00 , then your inventory carrying cost is .25, seen as an equation: ($250,000) ÷ (1,000,000) = .25
Now move the decimal two spaces to the right, and you have ⇨ ⇨ ⇨ ⇨ 25% Carrying Cost
In example #1, holding the inventory only has a net worth of 75% its original value. You can see the sum total worth of the inventory is being undercut by 25 cents for every dollar of the inventory’s value by what it’s costing you to store it.
EXAMPLE #2If your total inventory value is $500,000.00 , and the cost of storing the inventory is $250,000.00 , then your inventory carrying cost is 0.50, or seen as an equation: ($250,000) ÷ (500,000) = 0.50
Now move the decimal two spaces to the right, and you have ⇨ ⇨ ⇨ ⇨ 50% Carrying Cost
Suffice it to say, in example #2, holding the inventory is costing way more than it’s worth.
You Should Know
You should want to know your real-time inventory carrying cost. This figure allows your business to make informed decisions about how much inventory you should keep in the warehouse, how much to add, and how much it’s worth.
In a good robust inventory solution, the work is done for you, with costs and on-hand quantities being constantly updated in real time. Good software packages will update your inventory value, which is crucial for determining your inventory carrying costs.
Flowtrac calculates four types of cost. Last Cost, Average Cost, Last Landed Cost, and Average Landed Cost get updated with each receiving transaction.
Contact us to learn more about managing your inventory and reducing your carrying cost..