Carrying costs are the cost of holding inventory in stock. They’re also referred to as holding costs and inventory carrying costs, and they can have a significant impact on your dealership’s bottom line.
When it comes to your auto parts inventory, carrying costs may include:
- Storage costs
- Interest and fees on loans to pay for goods
- Employee costs - such as parts employees and administrators
Carrying costs can also include the cost of not taking another opportunity. In your service shop, this may include the cost of choosing to use space for storage instead of another service bay. Or it could be declining an investment opportunity because resources and capital are tied up in inventory.
High carrying costs could mean you need to change:
- Frequency of ordering
- Reorder points
- Ideal stock levels
- How quickly parts are moved
Ways To Reduce Inventory Carrying Costs
- Carry reasonable safety stock
Stocking exactly enough parts to meet forecasted demand can leave your parts department in a tough position if demand is greater than expected, or there is a delay in getting new stock. As such, you want to ensure you have a safety stock, but keeping too much on hand can result in high carrying costs.
To help ensure you are maintaining an appropriate level of safety stock, you can use your inventory management software. Most software will automatically calculate safety stock or, at the very least, provide you with the data you need to calculate it manually.
(Maximum Daily Use X Lead Time In Days) – (Average Daily Usage X Average Lead Time In Days)
Whichever method you use, it is important to ensure your inventory records are accurate or else your safety stock calculations may be incorrect.
- Reduce obsolete inventory
If it is not properly managed, obsolete inventory can eat away at capital and produce high carrying costs. To help reduce obsolete inventory, it is important to optimize ordering processes. This can be done by basing purchases on historical demand and seasonality. You should also keep track of inventory age and changes in technology so that you can offload the inventory before it loses all value. This can be done through promotions or by reaching out to other shops to buy excess inventory.
Lastly, you need to ensure your records are well-managed and that counts are precise so that you have a good overall picture of your inventory position.
- Make better use of your space
Poorly organized inventory can result in increased carrying costs in several ways. The first is that unorganized inventory can result in inaccurate inventory records. This can lead to increased obsolescence or ordering parts you already have on hand but can’t find.
Unorganized parts may also mean that you are using more space than necessary, increasing storage costs and overall carrying costs.
By using properly labelled bins, vertical shelving and thoughtful layouts (i.e. having popular items in central locations), you can help reduce storage costs. It will also reduce the risk of obsolescence and create space that could be repurposed for revenue-generating purposes, depending on the size of your storage space.
For more information on using inventory management to reduce carrying costs, contact our team of auto parts inventory professionals today.