Many businesses treat parts inventory management as a simple accounting task – they do a yearly count and consider the inventory as nothing more than tied up capital. This oversimplified treatment of their inventory diminishes their profits because there are costs that haven’t been considered. The longer a business relies on an inadequate inventory management system, the more these costs accrue over time.

Hidden inventory costs include:

Inventory Becoming Obsolete

“Tied up capital” implies that, at some future date, the capital can be freed up. The value of inventory, however, is never constant. Most inventory items – with the possible exception of precious metals and/or gems – decrease in value over time because technologies change, fashions change, materials degrade, products lose their desirability, etc.

Increased Insurance

If a company’s inventory increases substantially, their insurance premiums could increase to cover the additional product.

Lost Opportunity

If money is tied up in inventory, it isn’t being used in marketing, or in fast moving products, or in investments in things that improve profit.

Storage Costs

Storage costs can take two forms – the cost of the space needed to store the inventory or the cost of inefficiency related to not putting the space to more productive use.

Incorrect Amounts of Inventory

If a company has inaccurate inventory information, they run the risk of ordering parts that they already have in stock. This involves paying for the inventory items, for shipping and handling, and for storing parts that are unnecessary. The excess inventory then sits and depreciates in the warehouse.

The opposite of this is the failure to order crucial items because they were mistakenly believed to be in stock. This can lead to lost sales and possibly higher shipping costs because of rush deliveries.

Tax Payment Discrepancies

Inaccurate information may also cause under-reporting or over-reporting of inventory levels, which, in turn, means that a company might pay higher taxes than necessary or, worse, not pay enough taxes and require an audit.

These types of hidden costs can be avoided with an effective parts inventory management system. An effective system will cut costs by allowing a company to have better control over and knowledge about their inventory.

Want to know more about parts inventory management? Contact Acumen today!