Shrinkage, Obsolescence, and Holding Costs

In inventory management, three hidden costs, such as shrinkage, obsolescence, and holding costs, can negatively impact a business.

Shrinkage happens when inventory is lost due to theft, damage, or administrative errors.

Obsolescence happens when products become outdated or expire before they’re sold.

Holding costs include storage, insurance, and the opportunity cost of tying up cash in unsold goods.

Consider a retail store that holds a stock of one thousand smartphones worth five hundred dollars each.

If twenty phones are stolen or damaged, that’s a loss of ten thousand dollars.

If fifty phones become outdated due to a new model, that could result in a loss of up to twenty-five thousand dollars, although they might still be sold at reduced prices.

Meanwhile, the store pays two dollars per phone monthly for storage and insurance, totaling two thousand dollars per month.

Over time, these cumulative costs can substantially reduce profit margins.

By recognizing the importance of mitigation strategies, businesses can safeguard their profits and enhance operational efficiency.