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The Real Cost of Inventory:
|
Category |
$ Cost |
% |
| Interest on money: Borrow $2.5 MM at 9% interest. This does not count any lost opportunity from not investing this elsewhere in the business. | $225,000 |
9.0% |
| Space: Cost of having 20,000 square feet of warehouse space. Rent/mortgage $100,000 @ $5/ square foot, maintenance $10,000, utilities $15,000. | $125,000 |
5.0% |
| Spoilage: About $12,500 of inventory value lost to obsolescence. Products are sold at a discount or discarded. This cost is often hidden or ignored. | $12,500 |
0.5% |
| Damage to inventory: Estimate $25,000 of inventory lost to damage in storage and handling. Goods are lost and/or time and money are spent on repackaging. | $25,000 |
1.0% |
| Outside warehouse space: Space rental and service fees at $2,500 per month average ($30,000 per year). Add trucking cost $750 per month ($9,000 per year) and extra overtime of 20 hours per week at $15@ ($15,600 per year). | $54,600 |
2.2% |
| Personal accidents: Lack of space and systems causes accidents. The personal cost is incalculable but these are - extra overtime due to people off work 500 hours per year at $15@ ($4,500 per year). Increase in workers compensation insurance from poor safety record $36,000/yr. | $36,000 |
1.4% |
| Equipment & property accidents: Damage to equipment and property due to a lack of space and systems costs an estimated $18,000/yr. | $18,000 |
0.7% |
| Overtime due to inefficiency and mistakes: About 80 hours per week at $15 per hour is $1,200 per week ($62,400 per year). This is avoidable with proper layout, reduced inventory, and proper training. | $62,400 |
2.5% |
| Increased cost of expedited shipments: In order to make up for having the wrong inventory and still fill orders on time, some product is shipped in by overnight carrier. Estimate 10 times per week at $12@ ($6,240 per year). In addition, some extra deliveries are made - 2 times per week at about $36@ ($2,740). | $8,980 |
0.4% |
| Extra handling of excess inventory: An estimated 500 hours per year of management, clerical, and warehousing time are spent handling, counting, and managing the $500,000 to $1,000,000 in excess inventory. Estimate 500 hours at an average cost of $15 per hour ($7,500 per year) | $7,500 |
0.3% |
| Lost business due to delays and poor service: Estimate that 5% of orders are delayed due to warehouse inefficiency. Estimate that 2% of those customers are going to leave the company to buy elsewhere (100 per year). It costs about $500 to $1,000 in a salesperson's salary to replace each customer ($50- $100,000 per year) | $50,000 |
2.0% |
| Management time wasted: If management didn't have to spend their time fighting fires and just struggling to get the orders out, they could be investing in operating improvements for the company. A typical cost improvement program generates 10% savings each year. Allocate a conservative $100,000 for this missed opportunity. | $100,000 |
4.0% |
GRAND TOTAL REAL INVENTORY COST |
$724,980 |
29% |
This really surprised the managers involved. You probably will not find these exact numbers or all of these cost categories in your situation but you will probably find that your inventory is costing you more than you want in ways that you usually don't consider. If you haven't already done so, check your Inventory IQ to see if you might have room for improvement from a systems standpoint.
If you'd like to be more efficient own a copy of "Achieving World-Class Profit Improvement."
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Achieving World-Class Profit Improvement This powerful book contains everything you need to know to build a world-class cost reduction or profit improvement initiative. There isn't another resource like it. |
Cost Reduction & Profit Improvement
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