Strategies to Lower Inventory Supply Chain Costs

Strategies to Lower Supply Chain Inventory Costs

As a startup, you’re well aware of how inventory costs money and can quickly affect your cash flow without orders.

However, did you know that not having products to sell can be costlier than having too much?

Industry Week recently commented on how globalization has made supply chain management increasingly complex:

"Factors like cost structures, tax laws, skills and material availability, and new market entry have led companies to constantly redesign and reconfigure their supply chains, resulting in increased complexity."

To minimize risk, it’s important to understand the two costs associated with inventory and work toward a balanced inventory that doesn’t erode profit or impact cash flow.

Finding this balance isn’t easy.

However, it becomes easier when you itemize the costs of inventory in their appropriate categories. This requires reviewing financial statements regularly. (Check out this article on balance sheet analysis to get started.)

Understanding the costs beyond the simple cost of purchase enables better management of vendors in the supply chain.

So, how are these cost categories broken down? One category is the costs associated with high inventory and low order volumes. The other is costs associated with low inventory and high order volumes. From there, you can start thinking about cost-reduction strategies.

The cost of high inventory and low order volumes

Inventory requires capital.

Each time you borrow money, you are financing inventory and must cover that cost until your customer pays. This is the first cost of inventory. Keeping inventory on hand for long periods increases this cost.

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Other costs include damaged inventory due to mishandling, poor transportation, or poor storage.

Obsolescence is another cost.

This happens when you have inventory that is no longer required or in demand. Raw materials, work-in-process, and semi-finished inventory can easily become obsolete, forcing you to sell it at a discount.

Damage and theft are additional costs, as are insurance costs, freight costs, manual counting costs, and storage and handling costs.

All these costs increase during periods of low sales.

In fact, damage, obsolescence, and pilferage are more likely during low sales periods. This is because employees handle the inventory more often, increasing the risk of damage.

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