Businesses know that holding too much inventory can eat up your profits because you have to keep up with storage and handling costs, shrinkage, and depreciation. However, the effects of having too little inventory aren’t understood nearly as well.
There’s a large number of different costs that are involved in managing inventory. Keeping low inventory isn’t automatically going to make your costs go down. Here’s how low inventory can be harmful to your business.
Higher freight fees
Keeping a low inventory can backfire on companies that are trying to keep their cost of inventory low. They’re forced to rush and meet customer demand, resulting in higher freight costs per unit on incoming finished goods and raw materials. You might also have to pay employees overtime for waiting for shipments or repackaging.
Missing out on sales
Urgent customer calls might present the opportunity to get more business, or old customers might need replacements. With low levels of inventory, you’d constantly be running behind on your sales.
Customer demand is difficult to predict accurately, forecasts rely solely on assumptions and past trends, and things can change at any time. Businesses usually carry a small amount of extra stock to protect themselves against a stockout situation. While carrying extra stock has its own costs, it’s better than losing future sales because of a bad reputation of running out of stock.
Keeping low inventory has consequences for more than just your sales. Complex products might need a large number of distinct parts or materials, and the entire operation can be halted because you ran out.
Even without producing anything, the business would still face operation costs and may even fail to cater to customer orders.
Companies that buy finished goods, component parts, or raw materials often secure discounts by buying products in large quantities from their suppliers. Keeping a low stock can make your business miss out on price breaks, and frequent shipping of small orders can increase clerical costs.
Small business inventory management software
AltheaSuite is a batch tracking inventory management software that can help you keep track of your inventory from anywhere in real-time! You can get alerts on low stock and maintain constant inventory levels with a single click. They have a wide variety of features, including POS software, barcode inventory management software, and batch tracking inventory management for restaurants, mattress stores, and wholesale businesses.
Contact now to book a demo!