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Holding Costs Definition

Holding costs are the costs that come with storing unsold inventory. Inventory is an asset that requires a lot of financial investment. When it remains unsold, this comes with an additional cost. Because unsold inventory is stored somewhere, usually a warehouse, it might be taking up space that could be used for other types of inventory. Additionally, there are other costs associated with inventory management, like employee costs, utilities, insurance, and security. All of the above contribute to the rise of holding costs.

How To Reduce Holding Costs

Having high holding costs can hurt your business. That’s why you need to find ways to reduce them as much as possible. Here are three ways you can do that:

1. Avoid Overstocking

One thing that hurts your business is overstocking. While not having enough stock isn’t ideal, having too much stock can create more issues. Holding costs will increase if you continuously overstock your inventory. Additionally, when you tie your budget to the additional inventory, you miss out on other opportunities. Moreover, demand changes constantly. This might result in your inventory turning into deadstock that you will have to get rid of and therefore you lose even more money.

2. Clear out Dead Stock

As we mentioned above, demand for products can change. Many times you are left with stock that will never sell. Thus, instead of keeping that inventory in hopes that it sells in the future, it’s better to get rid of it. You can clear out dead stock by throwing it away, gifting it to customers, selling it with reduced pricing, donating, or if possible, returning it to the supplier.

3. Calculate a reorder point

When reordering your inventory, there is always the right time to do it. If you reorder new stock before it’s the right time you risk overstocking and therefore you can increase the holding costs. On the other hand, if you reorder it too late then you risk understocking. In this situation, you might not be able to fulfill orders in time. In order to calculate the right reorder point, you can either use different forecasting tools or you can keep constant track of your inventory with inventory management software. You can always set a minimum inventory level that works for your business.

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