The Cost of Not Measuring Your Inventory
We typically talk about what it costs to measure your inventory, but rarely do we discuss the cost of not measuring your inventory. Many companies create papers and marketing materials comparing the costs of different ways to measure inventory – drones, manned aircraft, terrestrial LiDAR, GPS stick and pole, wheel and tape, etc. However, a more interesting, and likely more important questions is this: What is it costing you to not measure your inventory?
What we mean by this, is what do book adjustments ultimately cost you every year? If you were to measure more frequently and get your books more closely aligned with reality, what could you save? The idea of cutting costs by rarely measuring your inventory is obsolete when you realize infrequent measurements could be costing your business more money.
Here’s an example of a client that recently signed up for our drone program. In previous years across 35 sites, they would write-off in the neighborhood of $1 million in inventory. The company doesn’t require these sites to get outside measurements more than once a year, if at all. Now, they are measuring monthly, so their books are tracking with their actual inventory. While they are paying more for inventory measurements than they have in the past, they are not paying anywhere close to the $1 million they write off each year. To use round numbers, assume they pay $100,000 across all of their sites to measure their inventories monthly. Even if you assume they still write-off $200,000 the Return on Investment still exceeds even the strictest criteria. ROI in this case is: (Gain from investment of $800,000 – Cost of investment $100,000)/Cost of Investment $100,000 = 700%.
Capturing accurate inventory measurements changes the way you operate your business, and that’s important. The more accurate your information, the more efficiently and effectively you can run your business. However, it’s important to remember there are other reasons to make sure you have an accurate inventory measurement, the first of those being accounting.
Firmatek recently met with another client to help them develop best practices for their inventory measurement. They were in a similar situation as our client with the million-dollar write-offs. They recognized that they had serious inventory management issues and brought us in to help them solve those problems. By the end of the meetings, they realized that “they were looking at their costs all wrong.” They realized that not measuring their inventory at all, or only once per year, was one of the biggest costs to their business.
We are happy to discuss the merits and the differences in costs and experiences associated with different types of measurement methods. But, it is important to note that the amount you pay for the measurement is not your only cost when it comes to inventory numbers. It’s time to rethink how you look at your inventory measurement costs.