Your warehouse is full and business is booming, but there can be too much of a good thing. As you admire your rows packed with inventory, consider that overstocking might be hurting your bottom line. It may be tempting to hold high levels of inventory to make sure you don’t lose sales and take advantage of the savings you get from buying in bulk, but it comes with various costs. Reducing inventory levels can also boost the working capital you need to develop and market new products and services.
High Inventory Levels Are Costly
Holding a lot of inventory requires valuable space you could otherwise use to increase profits. If you keep lower inventory levels and order minimal quantities only when needed, you free up shelf and floor space, allowing you to carry a wider product line that can attract more customers and boost sales. Holding a lot of inventory requires space you have to pay for, and that space typically needs cooling, heating and ventilation, and those cost money too.
Many companies finance inventory, and supplier financing typically comes with finance charges. In addition, the more inventory your company keeps in stock, the higher your cost to insure your inventory. Counting and monitoring inventory levels requires time, so holding a lot of inventory tends to increase your labor costs.
Almost any inventory loses value with time. Sometimes that happens quickly, such as with perishable food items, but even if your inventory isn’t perishable, it tends to degrade over time. That can result in quality issues that upset your customers, reflect poorly on your business, and add to your labor costs.
The more inventory your business holds, the more appealing it is as a target to thieves. Some employees may also be less wary of stealing inventory if they think a few missing items among a large inventory might go undetected.
Keeping high levels of inventory causes business owners and managers to spend more time managing inventory, valuable time they could have spent on other things. To maintain high inventory levels, managers have to spend more time communicating with suppliers, preparing orders and figuring out how to increase customer demand to justify high inventory levels.
There are some benefits to holding high inventory levels. For example, businesses typically save money on a per-unit basis when they buy inventory in bulk and may pay less for shipping as well. You’re less likely to lose a sale due to being out of stock on a product if inventory levels are higher. You have to weigh the benefits against the costs.
Free Up Cash
Holding high inventory levels ties up cash flow your business could use to advertise, increase sales of existing lines, and develop and market new products and services. Obviously, that means lost customers and future sales. Freeing up cash by reducing your inventory levels typically provides a source of cash flow that doesn’t come with finance charges.
Consider using tried and true inventory management methods to help you keep inventory levels down. For example, use just-in-time inventory management, first in/first out, or the ABC system. Whichever method you use to manage your business inventory, it’s a good idea to schedule regular inventory auditing throughout the year to monitor and maximize your inventory management program.