by Natalie Edwards

Inventory management is an inevitable cost to any business, but it’s an important number to know. Why? Because it’s also an area where significant savings can be made once you understand where all the costs are coming from, and where there are areas of waste. Use the tool below to estimate of how much inventory management is currently costing your business, and keep reading for an explanation of how it all fits together…

Labour

The first thing to be nailed down is the average hourly labour cost to your company. Inventory management involves quite a few tasks, and quite often there are multiple people involved. Usually there would at least be the purchaser, the engineers, and the accounts person to consider. This is not just an average across their hourly rate, but should also take into consideration things like holiday pay, sick leave, KiwiSaver contributions, company vehicles, or any other employee related expenses.
This number represents your average hourly labour cost.

Overhead Expenses

Now to the fun part – overhead expenses. We combine these into 3 sections: Stock Outs, Purchase Orders and Managing Stock on Hand.

Stock Outs

Running out of a consumable while working on a project can be a real pain, and there’s a number of ways it can impact production costs. To estimate how much it is costing your business you’ll need to consider the frequency of each of the following issues, and how much time is consumed for each occurrence:

  • Staff having to change the job they work on; change tools, find another job, shift materials, interrupt managers and work mates, delays on job completion, advise customers of delays.
  • Having to use an inferior consumable, meaning the job takes longer or causes H&S problems.
  • Travel to local shop to get products; talk & chat and stop for smoko on the way, find where an alternative is because 1st shop didn't have it, wait in line at the shop, research best alternative if normal product not immediately available.

Purchase Orders

There’s actually a lot that goes into making purchase orders, and the costs can compound quickly! Here’s some of the most common things that need to be taken into account when calculating the cost of making purchase orders:

  • How long does it take to work out what needs to be ordered?
  • How long does it take to make an order with the supplier? (eg. Typing out an email, navigating their website, describing what you need over the phone)
  • Once the order arrives, how much time is spent collecting it off the courier, checking the packing slip against the purchase order, checking for damage etc?
  • What about the time taken to pack the goods away/put them out on the shelves?
  • Let’s not forget the time for processing the invoice for payment!
  • How much is your average purchase order freight cost?
  • How often do you need to follow up on late or missing deliveries, short shipments or backorders? How much time goes into this?
  • Do you often have to check and fix discrepancies in the order?
  • How long does it take to organise the return of incorrect product?

Managing Stock On Hand

When it comes to managing the stock on hand there’s a few commonplace things that are easily overlooked, but do consume time. Have a think about:

  • How often does the storeroom need to be tidied?
  • How much extra time is being consumed from the storeroom being disorganised or messy, meaning your engineers can’t easily find what they need?
  • Do you take regular stock counts prior to placing purchase orders?
  • How often do sales reps stop by for meetings?
  • Do you spend time getting and comparing supplier offerings/quotes?

 

Analysing all of the above and looking at frequency and time consumed, this will give you a good estimate of not only how much your inventory management is costing, but perhaps areas where you may be able to sharpen your strategy and save some time and money!