You know by now that your inventory is a significant investment that you make in your business, but that inventory also becomes a business asset. However, unlike many other assets, that inventory can become a liability if not properly managed. While it may seem easy enough to manage your inventory while your operation is still relatively small, once your business begins to grow and develop you may begin to encounter issues including:
- Excess inventory
- Dangerously low stock levels
- Stranded stock
- Dead stock
- High storage costs for long-term or emergency storage
How Inventory Issues Can Be Avoided
First of all, you’ll need to make sure that you have enough inventory to ship out to potential customers quickly, but you also need to take care that you don’t amass excess inventory. Having too much inventory means you have a lot more capital tied up in that asset, which can eat up other money for transportation and storage resources. This is what is known as an “opportunity cost”, and there is a significant opportunity cost to sitting on excess inventory. It can be difficult to manage quickly, and it may age and devalue or force you to liquidate.
The other side of that coin is that you can also run dangerously low on stock, because it is crucial to revenue creation, and because nobody wants to tell their customer that they are out of stock. The right inventory level for your business will depend on seasonality, history, or customer demand. The only way to find out is to run a demand planning analysis to determine the optimum level.
Stranded stock happens when sellable stock is in a fulfillment center or similar warehouse setting but is not listed for sale on your site. You have inventory, but you aren’t technically putting it up for sale. This is also known as dead stock. This can result in storage costs for products that aren’t even being shown to customers.
Spoilage is a concern for anyone selling something with an expiration date. Things like food, cosmetics, and supplements all have a sell-by or use-by date, and when that date passes and you still own your inventory, that investment just becomes largely worthless.
Storage costs are one of the unavoidable aspects of using Amazon FBA models or private storage. Making sure your storage is optimized is crucial to keeping costs low and profits maximized. Even Amazon FBA will still require you to track your inventory level to avoid excessive fees for inventory storage.