How to Manage Consignment Inventory: Common Mistakes, Best Practices and Choosing the Right Technology
By Ron Schroeder, VP of Supply Chain, eTurns When distributors stock and manage inventory onsite with their ...Read Post
Holding inventory in your warehouse or stockroom is great for ensuring customers have access to what they need, when they need it. But there are costs to storing and holding these items, and they’re known as carrying costs.
Here, we’ll dive into what carrying costs are, why they can be problematic and how to reduce them by putting the right technology to work.
Carrying costs are the costs of holding inventory. This generally includes the costs of storing inventory in a warehouse and includes things like rent, utilities and warehouse employee salaries. It can also refer to costs such as insurance, perishability, or shrinkage. Essentially, carrying costs involve the costs you pay to keep inventory on hand for customers to purchase. Inventory carrying costs usually add up to about 25% to 55% of inventory value.
Inventory carrying costs are typically broken down into variable costs, fixed costs and other costs:
Because inventory has value, and it’s not free to store those items, there will always be some sort of carrying cost associated with your inventory. However, sometimes those costs are tying up more cash than they need to be.
Distributors incur carrying costs by:
Some of these costs may feel essential, and depending on the product and the demand, many of them might be. However, there’s a good chance that many businesses are determining how much inventory to carry not by a mathematic equation but more through a gut feeling. Unfortunately, the gut isn’t always the best guide when it comes to inventory planning.
Many distributors are keen to overstock “just in case,” or carry an excess of inventory that doesn’t actually meet customer usage demand. Many distributors rely on generic forecasts based on historical sales data to stock their distribution centers. The problem here is that those numbers don’t reflect actual customer usage.
Rather, you must use data that gives you a more realistic view of actual customer usage. The best data is gathered in real-time at the point-of-use. When you have that kind of insight, you can take a much more proactive approach with inventory replenishment.
To achieve this, you may have to look outside your traditional ERP. That’s where the eTurns TrackStock app can help. It can shift inventory planning from being based on a generic forecast to a precise, known quantity.
1) Base forecasts on usage. Rather than basing your sales forecasts on historical sales data, base them on actual usage. Find out what customers are actually using, and stock accordingly.
2) Sell off old/excess inventory in online marketplaces. If you have excess inventory on your shelves that isn’t moving, consider ways to sell it off. Bonus: You’ll improve your cash flow. Consider discounting the inventory to attract buyers, or sell them in online marketplaces where the products are more likely to reach a wider audience.
3) Invest in the right technology. Putting the right technology to use makes a big difference when it comes to making better decisions regarding inventory. ERP technology does not have the ability to drill down into actual customer usage data. Instead, optimize your distribution centers with actual customer demand and usage information rather than historical data and forecasts.
Overstocking inventory is a common problem. Distributors can reduce inventory (and recoup costs) when they base purchasing off usage, and not past sales alone.
Luckily, eTurns helps optimize inventory in distribution centers and customer stocking locations with actual customer demand information from the point-of-use. The eTurns TrackStock Apps, such as TrackStock Precise Demand Planning, TrackStock Replenish, TrackStock Manage, and TrackStock Min/Max Tuning, provide distributors with smarter insight as to which items your customers are going to order, when they will order, and the quantity they will order.
These apps use real-time customer usage data to optimize inventory and save cash — including from inventory carrying costs — so you can improve cashflow, reduce forecast errors and improve demand planning without watching money waste away on your warehouse shelves.
Want to learn more? Request a demo to begin lowering your inventory carrying costs today. (https://www.eturns.com/get-a-demo)