Inventory is viewed as an asset with an assigned value, but too much inventory can hinder profit margins, reduce available cash flow, and end up costing you.
As a bulk material (BM) company, it’s important to have the right amount of inventory on hand to meet the market demand, all while avoiding carrying excess inventory.
Excess inventory occurs when a BM company incorrectly orders inventory. If there is more inventory on hand than the market demands or market demands shift dramatically, a BM company could be left with more than they can efficiently sell.
Excess inventory has hidden, and not-so-hidden, costs. At Stockpile Reports, it’s our goal to help BM companies reduce risk and exposure, save time and money, and make inventory processes more precise and consistent. So, what are the costs of excess inventory?
Administrative Costs
We know that there are administrative costs associated with inventory management. From operation costs like rent, utilities, and payroll to inventory tracking and accounting, the buying, selling, transporting, handling and storage of materials is expensive. If BM companies are spending additional dollars on tracking and storing excess inventory, they are taking away from other revenue generating opportunities.
Reduces Available Cash Flow
BM companies need inventory on hand to meet the demand for the products they offer, but the more cash flow you have tied up in inventory, the less you have to spend in other areas. Companies that carry an abundance of inventory won’t have the cash flow to sustain digital improvement initiatives such as investing in new technology or process improvements. If companies order only the inventory they need and automate inventory ordering processes, funds will be allocated to the right areas at the right times.
Shifting Customer Demand
Having the right amount of inventory when it’s needed is essential, but having excessive inventory can be expensive and troublesome. The market drives demand for materials and products and tying up funds in excess inventory can be detrimental. If demand drops dramatically or goes in a different direction, companies could get stuck with inventory that no longer has the same value that it used to. BM companies must be agile and shift to meet market demands as quickly as possible without sacrificing profitability.
Inventory Takes Up Space
One major concern surrounding excess inventory is the cost involved with storing it. If the excess of one product is taking up valuable ground space, BM companies will lose out on being able to carry one or more profitable materials and products. Meanwhile, they are also measuring and managing low-turnover inventory that isn’t turning a profit or is experiencing decreased profit margins.
Reduced Profits
Excess inventory leads to reduced profit margins and year-end profitability. Companies with excess inventory often lose profit by carrying inventory in excess of what the market is demanding. This can happen as a result of human error or poor inventory insights and lack of best management practices.
BM companies may take a hit to their profit margins as well because they will be forced to sell excess materials at discounted prices to free up profitable space. If demand shifts away from the material entirely, a BM company is left with a material that is no longer worth what it was paid to produce, inventory, and transport it.
For example, as car dealerships near the end of the year and have the opportunity to bring new, higher value vehicles with significant profit margins onto the lot, we begin to see “end of the year flash sale” marketing. Why? Because last year’s models are taking up space on the lot and they need to be sold to free up space for the new models with higher demand. Dealerships discount these vehicles, making for a reduced profit margin, all for the sake of freeing up space and to make more money on high-demand vehicles. You won’t see a dealership holding onto a 2006 model in order to get full price when they could have the latest model on the lot.
Striking a Balance Between Inventory and Sales
Whether you are a ready-mixed concrete (RMC) company, an aggregates supplier, a state DOT, or a pulp & paper plant, finding the balance and the “sweet spot” for BM inventory can be an ongoing challenge and the cost of doing it inefficiently or inaccurately can hinder the profitability of a BM company.