To maintain the consistently high levels of availability expected by customers, many businesses are left exposed to soaring inventory cost. The question is, how can you put the brakes on supply chain costs without stalling availability?
What is inventory cost?
For many businesses, the inventory cost is typically the biggest and most important asset on the balance sheet. After all, without this investment in inventory, your business would simply not be able to satisfy the demands of its customers!
While the cost of buying the inventory is the most obvious form of inventory cost, a range of other cost factors should also be taken into account. For example, the cost of holding and distributing the stock as well as the costs associated with risk and interest must be considered. In essence, inventory cost is made up of the following three key components:
- Capital investment
- Handling costs
- Risk Costs
Why does availability drive inventory cost?
Maintaining a high level of availability can have a bitter-sweet impact on a business’s financial situation. On one hand, high levels of availability can increase a business’ revenue through minimising the risk of lost sales. However, on the other hand, holding large amounts of inventory requires a huge investment to buy the stock in the first place. Furthermore, this additional volume of inventory places additional pressure on transportation, handling and storage costs. Consequently, if stock levels are not managed effectively, the benefits of availability can quickly be eroded by avoidable inventory costs!
Optimal service levels: the key to a more successful operation
The relationship between inventory cost, revenue and profitability are obvious. However, achieving the highest possible level of availability while keeping inventory cost to a minimum requires a strategic level of thinking. After all, the inventory costs that result from trying to maintain 100% availability across every item within your assortment would force your business into bankruptcy!
Thus, in order to strike a balance between inventory costs, automotive businesses must prioritise their investment in stock on the items that matter most. This is where differentiated service levels come in.
How can you determine optimal service levels for your entire assortment?
Through establishing the right service levels, your business will be better positioned to meet the needs of your customers while still keeping inventory costs under control.
When describing a service level in its purest form, you are describing your company’s goal. Ultimately, it is a translation of your business strategy to your inventory strategy: you are deciding to what extent you want to satisfy your customer’s needs based on the level of the level of inventory cost a business is willing to accept.
Download our guide to setting service levels and minimise your inventory cost down today!
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- Aligning your service level strategy with the overall goals of the business
- Gaining insight into effectiveness of internal processes
- Establishing meaningful service level targets
- Reduce inventory cost without impacting availability