Inventory Management Cost

It’s a given that when you have a small business, there is going to be a cost for inventory management. A lot of people break it down further into ordering cost and carrying cost. Ordering cost in inventory management includes the purchase cost in inventory. Purchasing cost in inventory is an upfront expense that can often leave business owners short on operating capital. Depending upon what strategy you choose to use, inventory management will either cost you time or money. Even if you’re one of those who believe that time IS money, the one thing you don’t want managing your inventory to cost you is customers. That’s because of how much it costs you in precious resources to cultivate those customers. It’s difficult to calculate exactly how much future revenue is lost as a result of losing one customer, but some studies show it can cost five times as much to attract a new customer than to keep one. One good way to avoid that is to do a little research and find types of inventory pdf that includes some ordering cost examples that will help you determine the best ordering cost formula for your specific type of business. Carrying costs can include everything from warehouse storage fees to taxes and insurance, from employee costs to the losses associated with perishable goods. There is a lot to consider, question—and calculate. For example, how low would storage costs have to be for it to be profitable for you to order specific items in bulk? Does your inventory need the added expense of a climate-controlled environment? How quickly will your items lose value or become obsolete? The answers to all of these questions will determine your inventory management costs. One of the best answers to any question about modern e-commerce is automation.

What Are The Two Types Of Costs Associated With Inventory?

It’s easy enough to find a few types of inventory costs ppt presentation online. Some companies offering services that small businesses need even try to make the learning process fun by giving a “what are the two types of costs associated with inventory Quizlet” at the end of their presentation, so you can see how much information you remember. Most of them briefly describe each of the costs associated with inventory. We briefly touched on what inventory holding costs include, such as warehouse fees. While there are others, most costs are either ordering or carrying costs. So what is the ordering cost and what are some of the things it includes? Ordering costs cover any and all expenses incurred in gaining access to inventory. They include employee wages and labor costs such as payroll taxes. You need people to find suppliers and prepare purchase orders, right? Then there are the receiving costs. Somebody has to check in the merchandise you ordered to make sure it’s all accounted for. Ordering costs also include the cost of electronic data transfers as well as transportation costs. Shipping is one of the greatest expenses for e-commerce entrepreneurs. That’s especially true when returns and exchanges are involved. Returns also cost your business in terms of higher labor costs and more packing materials, in addition to increased shipping costs. That’s why investing in a system that reduces fulfillment errors saves you more than it costs. While the expense of a barcode scanning system may seem daunting when you’re just starting out, it’s a lot less expensive than placating angry customers who’ve received the wrong items. The more time you have to spend correcting mistakes, the less time you have for creating the kinds of sales promotions that make first-time customers life-long customers.

Types Of Inventory Holding Cost

If you’re buying inventory on credit, the interest on your financing is considered an inventory holding cost. You’d also need to factor in what that money could be doing for you somewhere else, such as earning interest in a mutual fund. Ideally, your money will be earning you more with your business than it could possibly earn you anywhere else. If you have business real estate and/or equipment, which in e-commerce would include computer hardware and software applications, depreciation and property taxes are considered a part of your inventory holding costs. Paying warehouse employees to pack up and ship your goods is also an expense related to inventory holding. Of the different types of inventory holding cost categories, inventory risk costs are among the most unpredictable. Risk costs include categories like shrinkage, spoilage, theft, vendor fraud, and damage or loss of items during shipping. If you are involved in the manufacturing process of the goods you sell, shortages can result in having to continue to pay factory overhead, even while production is temporarily halted. Deadstock, such as an oversupply of last season’s fashions falls into the category of risk costs as well. With all the risks e-commerce entrepreneurs have to take, it’s comforting to know that automation, coupled with an integrated system, can reduce many of those risks to a manageable level. A system like Ordoro, which was specifically designed for e-commerce, can automatically—and accurately—update your inventory levels with every purchase or sale. Ordoro’s data analytics allow you to see at a glance whether holding cost vs carrying cost is greater during a specific time period. You can choose which types of inventory holding costs you need to monitor in order to make the best ordering decisions possible. Having the right data on hand makes all the difference when calculating inventory costs.

Cost Of Inventory Formula

Cost of inventory expenses includes the following categories: storage, labor, transportation, interest, insurance, taxes, administration, depreciation, obsolescence, and shrinkage. The elements of the inventory carrying cost formula include the beginning value of inventory, the ending value, and purchase costs over a specific period of time. The formula is as follows: inventory cost = [beginning inventory + inventory purchases] - ending inventory. (It would be impossible to determine how to calculate inventory cost per unit without creating a customized holding cost formula for your business.) The carrying cost formula begins by adding up the cost of inventory expenses for a fiscal year. The next step is to divide that number by the total value of the inventory, then multiply that number by 100 to get a percentage. Whatever type of business you have, you should measure your inventory carrying costs regularly to avoid holding a disproportionate amount of inventory value. Using these formulas can help you determine whether you need to change your processes. Some software programs include a cost of inventory calculator that allows you to just plug in the numbers. For example, the first number you would plugin would be the value of the inventory at the beginning of the year. Let’s say that amount is $50,000. The second number you’d plugin would be the total you spent on purchasing more inventory throughout the course of the year. Let’s say that amount is $40,000. The third number you would plugin is the total of all the inventory remaining at the end of the year. Let’s say that amount is $20,000. The formula would be [$50,000 + $40,000] - $20,000 = $70,000. The final amount, $70,000, would represent your cost of inventory. Knowing your costs is one of the most essential steps towards increasing your profitability. Increased profitability equals more time to enjoy your success.

Importance Of Inventory Management Ppt

There’s no shortage of PowerPoint presentations you can find online about the importance of good inventory management to the success of a business. Rated best software for e-commerce websites, Ordoro doesn’t just automate and streamline your inventory management process—it improves all your processes. Its barcode scanning capability automatically adjusts your inventory with every sale and purchase. Increase accuracy while eliminating data entry and fulfillment errors. Ordoro’s kitting and bundling capabilities ensure that you’re never left with dead inventory and that your customers will never be disappointed with one of your sales promotions. Its multi-channel capability ensures that you establish and maintain effective communication with multiple suppliers. Dropshipping capability means you save on warehouse storage fees, and multi-carrier shipping capability includes deep industry discounts that reduce your expenses while increasing your customer satisfaction ratings. Ordoro allows you to keep your inventory information flowing to and from each of your integrated channels, whether it’s sales or supply-side. Data analytics allows you to make the most of that information. Designed specifically for e-commerce, Ordoro harnesses the power of automation and keeps you and your business on the cutting edge of technology. Their engineers are able to test and incorporate the newest features without compromising security or interrupting the processes you depend on. That means that your customers’ information is never compromised. They are so sure that their fully integrated system is the last one you’ll ever have to learn that they offer lifetime support. They also offer a free 30-day onboarding period to demonstrate what the power of Ordoro can do for your business and how to customize all the features it offers for maximum benefit. With Ordoro’s scalability, the only limit to how far and how fast your business can expand is your own imagination.