Imagine you’re a high-end furniture manufacturer. You source materials from suppliers with three to four weeks’ lead time, and the production process takes another two.
But any delays outside those expected wait times lead to problems and stockouts if you’re not careful. To meet demand quickly and efficiently — and to please customers — you have to keep supplies and a certain quantity of finished product on hand. This is also known as holding inventory.
Here’s everything you need to know to satisfy customers’ needs, prevent stockouts, and strategically manage products.
Holding inventory: An overview
Holding inventory is the practice of storing goods or products you’ve purchased or manufactured before selling them. It often involves buying or manufacturing items in bulk. This practice contributes to a business’s overall efficiency and profitability by avoiding major supply chain risks and streamlining production.
But holding inventory comes with costs, known as holding or carrying costs, and they can outweigh the benefits of holding inventory. Storage fees, insurance, and the risk of obsolescence or spoilage all add up. That’s why it’s crucial to develop an inventory management strategy that keeps the right amount of stock without wasting time and money.
10 reasons to practice inventory holding
Holding inventory offers several benefits to help you achieve your business goals. Here’s a detailed look at 10.
1. Avoid stockouts
Stockouts happen when you run out of a particular product. They often lead to lost sales and, in turn, lost business. The risk of stockouts is especially high during busier periods when you might not be prepared for the number of incoming orders.
2. Reach profit targets
Adequately holding inventory ensures a steady supply of products, allowing you to serve customers promptly and avoid costly stockouts. Meeting demand translates to increased sales, helping you reach profit targets. And as an added bonus, the savings from bulk purchasing may reduce your inventory cost per unit.
3. Reduce lead times
With inventory on hand, you can ship orders quickly, shortening fulfillment time. You won’t have to contact suppliers and manufacture an item every time since you already have what you need, which means faster fulfillment and happier, more loyal customers.
4. Avoid supply chain disruptions
Unforeseen disruptions in the supply chain — like a manufacturer suddenly shutting down operations due to health and safety concerns — often lead to order delays, unhappy customers, and lost profits. By holding safety stock on hand, you’re better prepared to deal with supplier delays and continue to meet demand.
5. Avoid last-minute supply orders
Ordering materials at the last minute usually costs more due to expedited shipping. When you keep extra inventory on hand, you avoid paying premium prices.
6. Meet seasonal demand
Many companies have peak seasons, so it’s easy to predict when business will pick up. Anticipating fluctuations in demand and stocking up on inventory beforehand ensures you meet increased customer needs at busy times of year without facing stockouts.
7. Streamline production
Having a readily available supply of materials makes for smoother production processes and prevents delays or stoppages due to possible missing components.
8. Manage risk
Holding inventory might not be the top business risk reduction strategy. But it mitigates the risks associated with unpredictable demand, supply chain disruptions, and price fluctuations, ensuring your business operations remain stable and profitable.
9. Support promotions
Special offers and promotions are effective, but not when you run out of the items you’re promoting. Inventory holding enables you to meet increased demand so you don’t leave customers high and dry. And if you accidentally overstock during a normally strong period of seasonal demand, you can run a promotion or kit items to move the excess inventory out.
10. Achieve supply chain flexibility
Holding different kinds of inventory from a diversified supplier base acts as a safety net for your supply chain. If one product sells out and you don’t have enough, you can promote in-stock SKUs while waiting for more.
The costly side of holding inventory
As beneficial as holding inventory often is, carrying too much is bad for business. Inventory holding costs eat into profits if you don’t manage them carefully. These include:
- Carrying costs: These costs arise from storing and maintaining inventory. They include warehousing and rent.
- Labor costs: You must pay the employees responsible for receiving, storing, and shipping inventory.
- Storage costs: The price of renting or owning warehouse space, as well as the cost of utilities and insurance, are known as storage costs.
- Depreciation: The equipment and machinery used to store and transport inventory loses value over time. So does obsolete stock.
- Opportunity costs: Sometimes, you miss out on profits because the money you would have invested is tied up in inventory of other assets.
- Capital costs: This is the opportunity cost of the money tied up in unsold inventory.
- Service costs: Service costs include expenses related to the inventory you’re holding, like taxes and insurance.
- Risk costs: Damage, theft, and inventory spoilage all contribute to losses.
Use this inventory holding cost formula to calculate holding costs:
([Storage costs + capital costs + service costs + risk costs] / total value of inventory) x 100 = inventory carrying cost (%)
4 strategies for reducing inventory holding costs
Inventory holding costs can be a major drain on a business, so finding ways to reduce them is a must. Try these proactive strategies to protect your bottom line.
1. Forecasting and inventory control
Accurate demand forecasting — predicting what customers want and when — lets you avoid overstocking items that won’t sell and prevent costly storage fees. Calculating the correct reorder point tells you when to replenish stock, and using real-time inventory tracking helps quickly identify slow-moving items and adjust orders accordingly.
2. Warehouse operations and optimization
Make sure your warehouse layout is optimized for easy access to inventory. This minimizes handling and improves lead times. And for even stronger inventory management, perform regular stock audits to catch discrepancies in your records and explore automation options for tasks like picking and packing. Improving your warehouse’s physical and operational state makes your processes more efficient, cutting down on labor and storage costs.
3. Strategic supplier relationships
When you cultivate strong relationships with reliable suppliers, you build trust and gain leeway so they prioritize your orders when necessary. That means you can replenish inventory more quickly and carry less safety stock. You’ll have fewer items to store, lower storage costs, and a minimal risk of products becoming obsolete.
4. Inventory turnover
A key strategy to reduce holding costs and improve profitability is to increase inventory turnover — the rate at which your company sells and replaces inventory during a specific period. Higher turnover generally means you sell items quickly and efficiently.
Implementing strategies like just-in-time (JIT) inventory, optimized pricing, and effective marketing can all contribute to increasing inventory turnover, ultimately lowering overall holding costs.
Manage inventory more efficiently with Fishbowl
Fishbowl’s all-in-one inventory management system transforms your inventory holding strategy into a powerful asset. Make data-driven decisions about inventory levels, optimize warehouse operations, and build stronger supplier relationships with Fishbowl. You’ll strike the perfect balance between holding enough inventory to meet demand and cutting down on unnecessary costs.
Don’t let excess inventory weigh down your business. Schedule a demo of Fishbowl, the intuitive, scalable, and user-friendly inventory management platform.