While it is true that a retail location can be costly to run, carrying costs can add up fast in an eCommerce warehouse, too. Merchants must find ways to reduce the cost of things sitting idle in the warehouse and eating away at the bottom line.
Many eCommerce business owners assume that not having a brick-and-mortar store will be a major money-saver. While it is true that a retail location can be costly to run, an eCommerce warehouse is not cheap either. Carrying costs can add up fast. Merchants must find ways to reduce the cost of things sitting idle in the warehouse and eating away at the bottom line.
In the effort to fulfill orders eCommerce shops need sufficient inventory on the shelves. Keeping too little on hand means backorders which can result in losing customers. The temptation can be to stock up so as to never run out. But having too much inventory can be just as detrimental, in the form of carrying costs.
Carrying costs are any expenses associated with holding inventory in stock. From the time products arrive at an eCommerce warehouse until they leave, the meter is ticking.
Reducing warehouse costs is possible, but depends on a few important factors:
Some carrying costs will remain the same, whether the shelves are empty or packed with products. A perfect example is the lease or mortgage payment. Business licenses, permits, and property tax fit this description too. Little can be done to reduce these costs, but considering how much square footage is really necessary is worth reviewing before moving into a larger warehouse.
Other costs are variable— but when and how they vary is different in every case. Thus, it sometimes helps to think of carrying costs as being on a continuum of “more or less” variable, rather than just variable vs. fixed.
For example, insurance and security will be necessary no matter what, but the expense might fluctuate depending on what inventory you carry, and your inventory levels in the building at any given time.
Utilities are a necessity too, as an eCommerce warehouse needs lights, heat, and air conditioning. Although these might vary with inventory levels too, they tend to be under much more direct control. Take refrigeration, for example: Turning off units when not in use could mean significant savings in the power bill.
Labor costs to unload and put away products are tied directly to inventory deliveries. Many companies use temporary employees to handle these jobs, so these costs may be reduced by controlling the number and frequency of deliveries, as well as the scheduling of labor. Automating as much of these processes as possible can also cut back on costs.
The costs listed above are not the only thing that might increase when an eCommerce warehouse has too much inventory. The more items on the shelves, the greater the chance of inventory shrinkage through breakage, misplacement, spoilage, or theft.
Controlling the amount of inventory on the shelves offers the most opportunities to reduce warehouse costs. Inventory management software helps managers perfect the ordering process so they have enough, but not too much, on hand.
Inventory management software has the ability to track historical data to spot trends and predict seasonal demand. Without this tool, managers are flying blind when it comes to how much to order and when.
In terms of carrying costs, consider this: Stocking up on snow boots in the fall is probably a good idea. But what happens when supply on the eCommerce warehouse shelves exceeds customer demand? The boots either take up valuable space until next winter, they go on sale at a deep discount, or they need to be discarded.
The same is true of products that become obsolete. Misjudging the demand for a specific SKU will end up costing money one way or another. Following the analytics provided by inventory management software will cut down on this type of waste.
In addition to warehouse costs to hold inventory, businesses also tie up capital when they order products. This opportunity cost means the money can’t be spent elsewhere—another reason to keep an eye on predictive analytics.
Another advantage of inventory management software is its ability to track exactly what is in the warehouse at any given time, and alert managers when stock is low. Inventory reports can also reveal when stock has been sitting in storage longer than usual, racking up carrying costs.
Adjusting order frequency based on inventory data can save in carrying costs. Alerts and automatic reordering are helpful tools, but managers should not simply set them and forget them. Making sure that they stay in sync with seasonal changes and other sales data is important too.
Keeping tabs on the supply chain is an important function of warehouse management software that can help in controlling carrying costs. Let’s say, for example, a supplier starts using a new shipper that delivers products several days earlier than the previous one. An eCommerce warehouse needs to have a place for that early-arriving inventory, and someone to put it there.
This situation might make it seem that the company needs more square footage for storage. In reality, adjusting the ordering schedule based on the new supply chain data will eliminate the problem.
The design and layout of a warehouse can make it more efficient, which in turn can reduce carrying costs. The quicker and smoother products can move from receiving to storage, and then from storage to shipping the better. This requires efficiency throughout the warehouse setup and in the movement of people, products, and equipment.
Optimizing warehouse operations for accuracy will also reduce returns. Unless they are thrown out, returned items will end up back in inventory where they will take up space, and therefore incur carrying costs, once again.
One way that some eCommerce companies reduce warehouse costs is by drop shipping or using a 3PL company for their warehouse and fulfillment needs. The 3PL company takes on the responsibility for all of the carrying costs, and the eCommerce company pays them a standard fee.
Whether or not this is a cost-effective strategy depends on many different factors. ECommerce businesses will want to make sure they partner with a 3PL that can support their product and their customer’s needs.
Every warehouse has carrying costs hidden in plain sight. Some costs are unavoidable, but eCommerce merchants must be alert to those that can be controlled. By knowing how much their inventory is costing to sit on the shelves, they can start to find ways to save.
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