Analyzing the needs of their clients is a priority for stock managers, as this allows them to better predict demand and therefore better manage stock rotations.
However, by solely focusing on the needs of clients and optimizing merchandize mouvements, stock managers leave out certain costs that have an important impact on margins.
Here are four concrete examples of stock holding costs that can have a negative impact on profits.
The cost of storage space
The cost of storage space is one of the first factors that companies can take into account to improve their margins, namely by optimizing the use of space.
However, it is not uncommon for such space optimization to lead to extra costs, which are not taken into account, and which are almost impossible to estimate due to their uncertain and infrequent nature.
One tends intuitively to think that a storage space which is 100% full would be less expensive per square meter, than a partially filled space, based on the principle of economies of scale. However, extra costs will incur from a packed storage facility.
Such costs include : extra lighting, a better ventilation system or longer operating hours, additional manual labor to maintain order and tidiness, proper organization to avoid any obstruction, an increased insurance policy to cover a higher stock value etc.
Although all of these costs will clearly impact profitability, they are generally underestimated. Then suddenly, the lack of free space becomes a bottleneck for day-to-day operations and requires immediate action in order to be able to resume a normal level of service. Urgent action will imply either renting temporary storage (more expensive than a long term commitment) or “flogging” any unwanted merchandise.
It is therefore important not to overfill storage space, as it can sometimes end up being more costly than renting additional storage space, or selling off excess inventory.
The cost of storage services
These costs too are often underestimated, largely because they are usually hidden within other costs or are charged indirectly. Directly assigning them to stock management cost centers or processes will provide better financial visibility.
These costs include:
- IT equipment,
- Dedicated apps and software,
- Inventory cleaning and handling services,
- Technical assistance services,
- Security, video surveillance services etc.,
- RFID equipment (chips and readers),
- Equipment rental (forklift, carts, trolleys, lifts, etc.).
All of these costs contribute to reducing your margins, and thus should be taken into account in your stock management optimization.
The cost of storage risks
The risks associated with storage also have to be considered at their true value, and be included in the costs to be monitored because they are far from negligible.
Product losses, deterioration during the storage period, damages caused by product movement and administrative errors are all risks that lead to extra chosts and should not be taken lightly.
This is especially true if you do not have efficient reverse logistics process, in which case the costs of returning products, from a warehouse to the manufacturer for example, can add to storage risks.
The cost of storage risks vary greatly from one sector to another but also within a given company from one storage facility to another. Storage facilities managers should therefore determine the types of risks they could be subject to and estimate costs accordingly.
Storing food products and edibles implies specific risks linked to “best before” dates or hygiene requirements, which will not applu to storing textiles for example.
The cost of capital
Hugely underestimated, the cost of capital actually represents a significant part of storage costs.
The cost of capital generally accounts for approximately 15% of all storage costs, whilst most companies estimate it at around 5% of their total storage costs. This difference is due to the fact that they base their calculations solely on short-term interest costs.
Underestimating the cost of capital in this way, makes it hard for companies to improve their profitability as they are fighting against an unknown or invisible enemy.
Calculating the cost of capital can be complex because it has to include the initial investment, assessment of storage risk, interest on cash tied up and the opportunity costs following the initial purchase of said merchandise. There is however a calculation method that is relatively reliable and has the benefit of being quite simple: WACC.
WACC, or “weighted average cost of capital”, is a calculation method that is based on the average yearly rate of return for lenders and other investors, and not only on the short-term interest fees.
What can be done to reduce these costs?
Get rid of your unsold stock by organizing a private sale on stokkly! That way you can quickly and easily make a profit off of your unsold stock, as well as free up space in your warehouses and reduce all of the costs described above.