When it comes to storage cost, there’s a lot of different elements that could be labeled under that term. While some retail companies can rely on their own warehouses to store inventory, others must find an affordable solution for their inventory. There’s a number of different expenses a company can have as it pertains to storing inventory, we’ll be discussing these storage costs today.
What Are Storage Cost?
Storage cost refers to the amount of money spent over the storage or holding of inventory.
Storage cost would be a subset of inventory carrying costs, which includes cost that are not limited to;
- Equipment Maintenance
- Warehouse Utilities
- Material Handling
- Security Personnel
- Building Maintenance
Only companies with tightly linked components that do not generate any type of irregularities within the production do not need to maintain any kind of storage, hence no inventory cost analysis.
While some companies may only require a specific product or material to be stored, other companies need to store many different materials, this could include but is not limited to:
- Raw Materials
- Finished Products
- Equipment Parts
- Shipping Materials
To offset the storage costs of inventory, some companies will include their storage cost into the final price of a material or finished product. While most companies do not add their storage and transportation costs onto the price of the finished product, some products with very high storage costs do have hidden or indirect storage costs added to their price.
Examples Of Inventory That Could Be Stored
In order to give a good example of storage cost, we’re going to need to measure the warehouse by square feet and calculate the total cost of renting it, along with other charges we’ll be responsible for such as electric and water.
For the next step, we need to determine what finished items are going to be stored, this could be a piece of furniture like a chest or bed. Also, we need to include any raw materials we may be storing, such as wood, nuts, bolts, metal plates, gravel, sandstone, all of these can be a part of the inventory.
Machines parts are other items that can be stored as inventory. Sticking with the same theme as our furniture example, this could include parts for the wood cutters since there’s a number of different tools that are required when you’re working with wood for furniture.
If you’ll be placing a security system at your warehouse or security guards, these would also be included in the storage cost.
How Are Storage Cost Incurred?
Let’s go back to the basics. Inventory refers to materials and products that are in stock or stored goods that are maintained by a company or warehouse. Inventory management is always a big key to the success of any business. Companies usually like to store their inventory close to their customers but in other cases, some businesses may not have that luxury. Due to this, you’ll find production sites close to the main location for the business. The amount of finished products in storage are referred to as on-hand inventory.
There are various other types of inventories that are not related directly to the independent demand of the finished product, but consist of goods involved in maintaining the production line.
Inventories of raw materials, machine parts involved in the production, assemblies, and sub-assemblies processed or waiting to be processed in the next step are known as work-in-progress inventory. These are known as dependent demand and do not have any direct connection to the market demand of the finished item.
The cost of keeping inventory increases due to a lot of issues and need to be dealt with smartly to cut out unnecessary expenses.
How Is Storage Cost Distributed?
Storage costs can vary from one scenario to the next, there’s no “one answer fits all approach.” With that being said, there is a lot of storage costs that are shared among most companies, this would include;
- Total Square Feet
- Total Time Of Renting
- Total Amount Of Inventory Being Stored
- Climate Control Options
- Security Options
A high-level storage facility increases the cost of inventory on-hand, expenses that some companies may not want. However, you need somewhere to store inventory, whether you build a warehouse yourself, rent a warehouse or use some other type of storage strategy.
Self-storage is always an option. While it may cost you now to build a warehouse, you’ll be able to use that warehouse for decades to come, it could be an investment that’s worth the cost now.
But it is only for established companies with considerable amounts of inventory at every level. A conveniently placed facility is generally the smarter choice.
With climatically controlled storage units, you can expect to pay 10-15 percent more than the non-climatically controlled units. If you have stored goods that need climate control, you don’t have a choice but that doesn’t mean you shouldn’t look for the best deal for your company. These are essential in areas with high humidity, heat, or both.
Security is another major part of a contract. You want to know your products are protected, safe and secure. The last thing you want is to store your inventory at a location and take that risk of goods being stolen.
Although it might sound like a lot of effort to develop the perfect storage facility and manage the costs, once done it will safeguard your firm against unprecedented losses and probable raw material crises.
*Accelerated Analytics publishes resources like this to provide insights to different analytical metrics, data points and formulas. POS Analytics. Please be aware, this doesn’t mean that our product will this metric, data point or formula. To learn exactly what our reporting covers, please feel free to schedule a demo or give us a call. Thanks for understanding.