02 January, 2024

Discover the True Cost of Inventory Inefficiency

Do you know how much money your business spends on inventory inefficiency? It’s not a line item on your balance sheet or income statement, so finding the exact number can be tricky. Still, that doesn’t mean it’s not essential.

Running a business with inventory inefficiency is like trying to transport water in a bucket that’s riddled with holes. A few holes aren’t a huge cause for alarm, and you’re able to patch them up. 

However, if there are too many, you start leaking significant amounts of water and end up with an empty container by the time you reach your destination. For sellers, that slow leak represents the unnecessary cash leaving your business.

Each small inventory inefficiency acts as its own hole. One seems innocent enough on its own, but collectively, poor inventory management can drain your reserves faster than you expect. Soon, any revenue goes straight to patching holes, and you’ve lost sight of anything else.

Cin7 and Connected Inventory Performance (CIP) help you control your costs so you have smooth sailing.

A closer look at inventory inefficiency

Inventory inefficiency, also known as poor inventory management, results from relying on manual processes for inventory control. Businesses suffering from poor inventory management often lack real-time visibility and the ability to automate workflows. 

Those cumbersome manual processes result in issues like overstocking, understocking, unmanageable expenses, and negative customer experiences.

Common warning signs of inventory inefficiency include:

  • Highly manual workflows
  • Poor supplier relationships
  • Lack of process automation
  • Inaccurate demand forecasts
  • Inefficient warehouse practices
  • Lack of real-time inventory data
  • Outdated inventory management systems 
  • Lack of communication between the inventory department and other parts of the business

Combined, these issues drive up costs and stunt your business’s growth. To better understand the consequences of poor inventory management, let’s examine how inventory inefficiency translates into financial costs.

The financial consequences of poor inventory management

The effects of poor inventory management, like stockouts, obsolete inventory, and customer loss, don’t just eat into your profits; they make it almost impossible to increase your revenue and take your business to the next level. 

Each consequence of poor inventory management directly affects your bottom line.

Missed sales

Poor demand forecasting, lack of real-time inventory data, and supply chain inefficiency result in understocking and empty shelf stockouts that result in missed sales. If demand for a product is high and you don’t have enough inventory on the shelves, you’re missing out on potential revenue.

Like our bucket full of holes, each missed sale might seem small, but they add up until you’ve lost more than you can afford. According to a study by IHL Group, empty shelves are one of the primary causes of inventory-related losses, costing businesses $29.6 billion in North America in 2022.

The average small employer in the U.S. brings in around $6 million in annual revenue. Missing even two percent of sales for the year would lead to $120,000 in lost revenue.

Plus, efforts to rush the delivery of new stock to avoid missed sales cost even more. Costs for expedited purchase orders from suppliers typically range from 15% to 25% more than the regular sale price, depending on the supplier. You may be able to remedy the customer experience in the short term, but it’s going to cost you in terms of profit margin.

Customer loss

When poor inventory management leads to stockouts, you risk losing the customers you worked hard to win over. One study found that 40% of e-commerce consumers will leave their preferred brand for a competitor if the preferred brand doesn’t have items in stock.

An out-of-stock item means you don’t just miss out on a single sale. You risk losing the lifetime value of each customer who leaves. To determine a customer’s lifetime value, you can use the following formula:

Customer lifetime value = annual revenue per customer * customer lifespan

For instance, say your brand’s average returning customer spends $100 annually for 10 years. That’s a lifetime value of $1,000. In this case, each customer leaving your brand due to lack of stock represents a potential loss of $1,000 if they don’t return. If you average around 500 customers a month, like many small businesses, and 40% leave, that’s a $200,000 loss.

Since the lifetime value of a customer can vary widely between businesses, the actual loss amount you’ll experience could be much more. 

Plus, marketing towards existing customers is often less expensive than winning new buyers. So, in addition to losing out on repeat purchases, product sellers often need to increase their marketing budgets to recoup the loss of existing customers.

Inventory obsolescence

Empty shelves are bad for business, but so is too much inventory. Excess inventory results in poor turnover times and high storage costs because you’re essentially paying to store products that aren’t generating revenue.

Consider the average monthly rent for warehouse space in the U.S., which is $8.84 per square foot, and the average warehouse size is 17,500 square feet

If five percent of that warehouse, or 875 square feet, is occupied by obsolete inventory, that’s a total cost of $7,735 per month to store products that aren’t moving.

Obsolescence is generally a result of overstocking. To fix issues caused by overstocking, you may have to offer steep discounts that eat into your product margins or result in a net loss just to free up that warehouse space. 

Over time, the dead weight of obsolete and overstocked inventory keeps your costs high and takes up space that you could be using to hold products that sell and drive profits.

Opportunity costs

One of the key characteristics of inventory inefficiency is inaccurate demand forecasts, which leads to wasteful spending, leaving your business bloated with costs. Either you need to pay for expedited delivery to accommodate understocking, or you’re spending thousands of dollars to store items that aren’t selling.

High costs and low inventory turnover are a recipe for a working capital disaster. Instead of having funds to invest in growth opportunities such as new locations, additional sales channels, or product development, you struggle to pay bills on time.

Even if you had the money to put towards a new growth strategy, you might not have the manpower. 

Product sellers rely heavily on manual inventory management processes such as physical stock counts and processing orders by hand. As a result, they can’t accommodate large orders or sales volume growth without increasing headcount, making it impossible to scale effectively. 

How Cin7 empowers you to avoid the costs of inventory inefficiency

Cin7 helps product sellers eliminate poor inventory management practices by enabling Connected Inventory Performance (CIP). With Connected Inventory Performance, you have real-time visibility into your stock levels, access to accurate demand forecasting, and the tools you need to build strong relationships with suppliers. 

Cin7 helps you run a tight ship where you can control costs, streamline operations, and set yourself up for significant growth.

Real-time inventory data

Effective inventory tracking is the foundation of a successful product business, making it no surprise that 59% of companies rely on real-time inventory data to enable smooth business operations. Cin7’s inventory management software gives you full visibility into the product life cycle, including real-time stock levels. 

With this level of clarity, you can avoid costly issues caused by over- or understocking. Instead, you have accurate inventory level information to ensure you reorder products with enough lead time to keep items on the shelves or pause orders when products aren’t moving as fast.

Cash flow insights

In addition to real-time inventory levels insights, Cin7 enables accurate job costing so you can easily track cost of goods sold (COGS) and profit margins. Understanding your COGS on a product level means you can adjust profit margins on the fly by finding ways to cut rising inventory costs and prioritizing high-profit items. 

Cin7 also allows you to accurately track how much revenue is coming in, and how much you’re spending on inventory, giving you a clear picture of your company’s cash flow. With this information, it’s easy to see how much working capital you have available to invest in sales and marketing. 

Efficient warehouse management

Cin7 also helps you lower your cost-per-order by enabling better warehousing practices. Teams that use Cin7’s Warehouse Management System (WMS) reduce up to 40% of their walking time with the help of efficient warehouse layouts, guided paths, and dedicated warehouse zones. 

When your current staff isn’t spending so much time walking from one area to the next, they can pull more orders, and you won’t need to increase staff levels as quickly.

Scalable business growth

With precise inventory data and cash flow insights, Cin7 enables data-driven growth. By having transparency in your business, you’re able to identify your strongest revenue drivers along with significant growth opportunities. 

Beyond arming you with accurate information, Cin7 gives you the powerful process automations you need to take your business to the next level. Instead of working in your business, you have the tools that help you work on it.

The financial consequences of poor inventory management

While they may not seem obvious at first, the costs of inventory inefficiency are real and significant. Poor inventory management leads to a steady and unnecessary rise in costs that can easily overwhelm any small business owner. 

By using Cin7 to enable Connected Inventory Performance, you get the real-time inventory insights, precise cost data, and powerful automation you need to run your business like a tight ship. 

Discover how you can avoid the costs of inventory inefficiency with the help of the right inventory software platform by requesting a Cin7 demo today.

Stop managing your inventory.
Start connecting it.