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Transcript

The Hidden Cost of Dead Inventory · Modularity Podcast

• 0:00
  If you have a hundred thousand dollars of parts or unsold materials sitting on a
• 0:04
  warehouse shelf...
• 0:06
  or even packed in the back of service vans right now...
• 0:10
  do you know what that stock actually costs you every single year just to sit there?
• 0:16
  Well, I mean, if you already paid for it, it...
• 0:18
  it just sits there, right?
• 0:20
  Isn't the cost already sunk?
• 0:21
  That is the trap!
• 0:23
  Industry data actually shows carrying costs range from twenty percent to thirty
• 0:28
  percent of your total inventory value every year.
• 0:31
  So that hundred thousand in parts?
• 0:33
  You are paying anywhere from twenty thousand to thirty thousand dollars annually
• 0:37
  just to keep it in your building.
• 0:39
  Wait, twenty to thirty grand?
• 0:42
  Every year?
• 0:44
  How does a pile of metal or plastic cost thirty thousand dollars just existing?
• 0:49
  Because carrying cost is not one single line item on your ledger.
• 0:54
  It gets broken into four distinct buckets.
• 0:57
  First, you have capital costs.
• 0:59
  That is either the interest on the line of credit you used to buy the stuff,
• 1:03
  or the opportunity cost of that cash being locked up where it cannot work for you.
• 1:07
  Okay, right.
• 1:08
  Working capital tied up.
• 1:10
  Exactly.
• 1:11
  Second is storage costs.
• 1:13
  Rent, square footage, heating, keeping the lights on, material handling.
• 1:18
  Third is service costs...
• 1:20
  insurance premiums, which scale up as your inventory value grows,
• 1:24
  plus property taxes on stock.
• 1:27
  And fourth, the big sneaky one...
• 1:30
  risk costs.
• 1:31
  Risk like...
• 1:33
  theft?
• 1:34
  Theft, shrinkage, physical damage when someone backs a forklift into a pallet,
• 1:39
  or straight up obsolescence.
• 1:42
  A part sits for eighteen months and suddenly the manufacturer releases a new version
• 1:47
  and your old stock is worth zero.
• 1:49
  That issue comes up constantly with bulk ordering.
• 1:52
  A company sees a ten percent discount for ordering two hundred units instead of
• 1:56
  fifty and jumps on it.
• 1:57
  Ah, the classic volume discount trap.
• 2:00
  Exactly.
• 2:01
  It looks like a ten percent savings upfront, but if those extra units take fourteen
• 2:05
  months to turn over, carrying costs and damaged units completely erase the discount
• 2:10
  and turn into a net loss.
• 2:12
  People think stockpiling extra stock is a safe hedge against inflation or price
• 2:16
  hikes.
• 2:18
  But when your holding costs are bleeding out twenty five percent a year,
• 2:21
  a five percent supplier discount is a trap every single time.
• 2:26
  So if someone is listening right now and thinking...
• 2:29
  man, I have no idea what my actual holding percentage is...
• 2:33
  how do you figure that out without spending three weeks in a spreadsheet?
• 2:37
  It takes under ten minutes.
• 2:39
  Take your total annual holding expenses...
• 2:42
  map out your storage, insurance, estimated risk, and interest...
• 2:47
  divide that sum by your average inventory value for the year,
• 2:50
  and multiply by one hundred.
• 2:52
  That gives you your exact carrying cost percentage.
• 2:55
  Okay, once you have that number...
• 2:59
  what are the actual operational moves to drag that number down?
• 3:04
  First, establish strict minimum and maximum reorder points in your software instead
• 3:09
  of buying on intuition.
• 3:11
  Second, for high cost or fast moving parts, negotiate vendor managed inventory or
• 3:17
  consignment with your key suppliers.
• 3:20
  Let them hold the stock until you actually sell or install it.
• 3:24
  What about quick wins?
• 3:25
  Like, what can a business owner literally do this Friday?
• 3:29
  Two immediate quick wins.
• 3:31
  Number one: pull a ninety day inventory movement report.
• 3:35
  Anything that has not moved or been installed in ninety days goes onto a dead stock
• 3:40
  list.
• 3:41
  Number two: take those slow moving items and bundle them into discounted package
• 3:46
  offers or clearance kits.
• 3:48
  Convert that stagnant hardware directly back into liquid cash.
• 3:53
  Because cash sitting in the bank gives you operational flexibility.
• 3:57
  Dust sitting on a part in a warehouse gives you...
• 4:01
  well, a bill.
• 4:02
  Precisely.
• 4:03
  Cash in the bank always beats dead stock on a shelf.
• 4:05
  And look, if you want help optimizing your operations, building smarter software,
• 4:10
  automating workflows, or refining your overall business strategy...
• 4:14
  you can check us out at modularity.us.
• 4:17
  Good stuff.
• 4:18
  Stop paying rent on dead parts, people.