Do you know exactly all your storage costs? Most small and medium enterprises underestimate or do not even try to determine the actual storage costs of individual products. Why is this so important in running a profitable business venture, even if the overall balance is satisfactory? Proper inventory management can not only bring savings, but significantly increase income and accelerate the development of an enterprise. In the text below we define the storage costs and present a way to calculate them.
What is the “storage cost”?
The number of ready-to-sale products in the warehouse at a given time is called the available stock, and the cost of storage is the amount spent on storing inventory. It includes the costs of rent, utilities, staff, equipment maintenance, building maintenance and security.
With long-term storage, these expenses should be multiplied by the number of months. Rarely do companies take into account other costs, such as the risk of damage or loss of goods offset by insurance, that also costs money. Even more rarely, the decrease in the good’s value over time is included in the calculations.
At the end, it is also worth adding time spent on cleaning and control activities, subsequent inventories, and finally thinking about how to sell these products at a profit.
How to calculate storage costs?
Storage costs are easy to calculate when we only store one type of product and rent a place in the warehouse. We simply divide the full month cost (K) by the number of items (S) and multiply it by the number of months (M) during which we were paying for the service. We can then easily compare the result with the margin on the product and determine how long it is profitable to store it.
product storage cost = K: S x M
More advanced mathematics begins when we use our own or leased warehouse and need to add various variable costs to fixed fees. Often the depot is used to store not only very diverse products for sale, but also packaging, sales and advertising equipment, etc.
First, we have to sum up all expenses (including work) related to the warehouse (K), and then count how much of the total space the given product occupies in proportion to other items, e.g. 1 of 8 racks.
K = k1 + k2 + k3 …
product storage cost = ⅛ K: S x M
If we count the area occupied by our products, we must remember to include an area that provides free access and – proportionally to the rest of the items stored – additional surfaces (including entrance to the warehouse, alleys and corridors).
Many companies do not pay much attention to these costs. Sometimes it appears that it would be much more beneficial to get rid of the residual goods and allocate space for another merchandise, or for better exposure (enlarging the showroom/store), or for new job sites. Even letting space in the warehouse could bring more money than hamstering unsold goods.
If you have calculated or even suspect that it is no longer profitable to store products:
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…or read the first part: “Surplus merchandise – how to get rid of the trouble? (part 1)”