What is the Cost of Damaged, Lost or Stolen Inventory?
Recently I was walking through a warehouse with the owner of a small distributor, when one of his employees brought him a widget that had been damaged by a forklift. The owner told him to trash the widget, and to tell accounting to write it off (the value of this widget was $170). This got me thinking, “are they aware of the cost to replace this widget?”
Later, I asked the warehouse person how much they would need in sales to replace this widget; he said $170. Well, not exactly – let me explain.
In order to replace the cost of the damaged widget, the money must come from the margin of future sales. This company earns a 2% margin for this widget, so they must sell 50 widgets, just to pay for the widget that was damaged! That is $8,500 in additional cost!
$170/.02 = $8,500 in new sales needed to replace said damaged widget $8,500/$170 = 50 widgets
This example doesn’t take into account carrying costs; if carrying costs were 30%, the replacement cost would be $11,050!
To avoid making a mistake like this it’s wise to make sure your inventory is optimized. No one likes paying more than they have to!
Again, to break even on lost, damaged or stolen inventory, the replacement cost comes from future profits! How much harder must your sales team work to make up for damaged, lost or stolen inventory?
These little inventory costs that occur daily and weekly add up over time, and at the end of the year, these “little” costs can have a substantial effect on the bottom line. Therefore, it is important for employees to understand costs associated with inventory, and the impact it has on the company’s financials.