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Common Inventory Management Costs

The most obvious cost associated with having inventory is the price you pay for the individual items. However, there are less obvious (yet significant) costs that can be associated with keeping inventory. Below, we discuss some of the more common types of carrying costs associated with inventory.

 
 

Storage

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Storage

Examples of storage costs include:

  • purchasing or renting space required to house inventory
  • utilities (electricity, internet, climate control)
  • storage infrastructure (shelving, coolers, bins, boxes)
  • furniture for personel
  • utility costs

Facilities that are bursting at the seams certainly understand these costs better than anyone. Organizations that need to expand existing storage space for an expanding inventory also have to deal with these costs.

For some online store owners, opening a retail space with an attached stockroom for fulfillment activities can be advantageous. This setup helps defray the cost of a stockroom or warehouse, provides regional search advantages, and allows you to “own” more of the process. Small to mid-sized businesses can typically reduce cost by having customer service personnel help with in-person sales and basic fulfillment activities at the same time (and on the same paycheck).

 
 

Handling

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Handling

Examples of handling costs include:

  • personnel time associated with receiving and stocking
  • recognizing and submitting for new inventory purchasing
  • website management to ensure inventory levels are communicated accurately
  • organizing inventory (shipments and returns)
  • producing any paperwork needed to document tasks
  • packing materials and/or equipment

These costs may be more difficult to identify if no one is dedicated full time. However, the costs are present even if the tasks only require a portion of a person’s time. One way to reduce the need for handling costs is to reduce the likelihood of returns or exchanges, namely by improving the customer experience.

Expanding the window of opportunity in which a customer can add a discount or coupon, or simply asking for a review, can improve customer sentiment regarding your handling. Having a polished, thoughtful handling process can greatly minimize customer service issues. Evaluating and developing your handling process can be an opportunity to build brand loyalty, decrease the time to next purchase, and increase customer lifetime value.

To get some ideas on how to improve your order management and shipping strategies, check out:

 
 

Insurance and Taxes

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Insurance and Taxes

Any general business insurance policy will cover inventory. If the inventory is significant enough in value, separate coverage may be required. Often, you'll find inventory insurance covers damage during handling of your goods, theft and/or pilferage, shortage, and damages caused by natural disasters.

Here are some resources to help you get started:

 

Additionally, taxes on inventory and property can vary by state and changes can occur frequently. Individuals and businesses are liable for use tax if you purchase an item that you use, give away, store, or consume in your home state without paying sales tax. The purchaser may be a business, such as a manufacturer or a distributor, that buys inventory outside the state or online, to use, give away, or consume as personal property.

For example, it's likely you may need to pay use tax if you:

  • buy something in another state and bring the item into your home state
  • buy something from someone not authorized to collect sales tax, like a dresser via a craigslist ad
  • buy an item over the phone, by subscription, or from a mail‐order catalog company without being charged sales tax
  • withdraw from inventory for their own use or give away as donations or promotions
 

If you’re interested in learning more, our expert partner Avalara crafted a blog post with BigCommerce detailing sales and use tax compliance for businesses. Also included is a comprehensive ebook, Sales & Use Tax Compliance for Dummies.

Avalara's Free eBook: Sales & Use Tax Compliance for Dummies

 
 

Obsolescence

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Obsolescence

Some products — like food or flowers — are perishable, clothing trends go out of style, and electronic devices can become out of date with the release of a new version. In the realm of business inventory management, obsolescence refers to those products that have difficult or impossible to sell. Costs associated with obsolescence can occur for a variety of reasons, but one of the more common scenarios is holding onto inventory for a long period of time.

What will you do if you run into obsolescence and you have many of those items on your shelf? Do you still have items associated with the old product, for which you can bundle and market the item to gain some amount of revenue? Do you have an outlet to sell older inventory when needed? Can you recycle the products for a small sum?

Of course, selling inventory on eBay is a popular option, but you can also try featuring your older (but not obsolete) products as part of a giveaway, or use them in outreach efforts to bloggers, social media efforts, or PR activities (like donating to a non-profit organization).

 
 

Theft and Damage

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Theft and Damage

Unfortunately, if proper controls are not put in place, an organization is exposed to the risk of theft. Further, damage can occur in a variety of ways: parts are not stored properly, climate control is not reliable, procedures for moving heavy parts are not clearly defined, or parts remain in inventory for long periods of time.

 
 

Investment

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Investment

Inventory is an investment, and all businesses, big and small, have a finite amount of resources. The above items are not meant to discourage you, but part of running a business means finding a delicate balance of the resources you have available. With proper management and leveraging of data, you can uncover opportunities to invest inventory budget into growing other areas of your business.


Learn More:
  • Connect with our Community of expert store owners and BigCommerce staff regarding this subject.
  • Contact one of our integration Partners to receive advice and details on how they can help develop an inventory strategy and/or streamline your inventory management processes.
  • Follow our BigCommerce Blog to learn more about industry best practices and recent trends that can help you grow your online business.

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