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5 Ways Too Much Inventory Is Costing SMBs

ECI Software Solutions Presents

Originally published
Originally published: 12/1/2023

One of the most significant mistakes small HVACR business owners make is carrying too much inventory. Overbuying is typically a result of using manual inventory and warehouse management systems that are clunky, inaccurate, and costly. The costs to purchase, transport, and store excess stock can take a massive bite out of your operating budget and, eventually, your profits. 

Effective inventory management is a crucial aspect of running a successful business. Carrying excess stock in your warehouses and trucks can have significant financial repercussions. Overbuying often occurs when outdated and inefficient inventory management systems have a negative impact on your purchasing, transportation, labor, and storage costs, leading to lost profits. This article outlines the five ways excess inventory costs small businesses and how an automated inventory management system can fix the situation.

Prevent Inflated Item Costs

One of the primary costs associated with excessive inventory is the item cost. Without real-time insight into inventory, outdated data forces businesses to rely on educated guesses to determine stock levels, which can lead to inaccurate assumptions about when to reorder products. Unfortunately, the perception of urgency leads to the practice of placing orders at inflated prices. That leads to overspending which could have been averted by using precise, current inventory information. 

An automated HVACR inventory management system takes the manual guesswork out of ordering. Inventory can be tracked in real-time, ensuring new orders are placed only when they are truly needed. This can not only bring substantial cost savings, but it can also prevent the increase of your item costs.

Streamlined Transportation Strategies are Crucial

Transportation costs are a sizeable factor contributing to your inventory costs, especially when faced with escalating fuel prices and disruptions in the supply chain. When a company overbuys inventory, it inadvertently incurs unnecessary expenses related to transporting goods. This inflates operational costs and puts further pressure on already stressed supply chains. As a result, efficient inventory management and streamlined transportation strategies are crucial for businesses to navigate volatile economic conditions efficiently and maintain a competitive edge. 

By automating inventory management, transportation costs are reduced through accurate demand forecasting and inventory control. Transportation expenses can be minimized, and overall supply chain efficiency can be improved by reducing the practice of over-purchasing and striving toward timely restocking.

Reduce Labor Costs

When surplus inventory arrives at your warehouse, someone must unload trucks and organize the incoming goods. Labor costs associated with these tasks can accrue swiftly, especially when handling large or heavy orders. The time and effort expended by employees to reconfigure the warehouse layout to accommodate the excess stock would be better directed to more productive areas of your operations. This misallocation of labor and time resources hinders overall operational efficiency and diminishes the productivity potential of your team.

These processes can be streamlined with automated inventory management, which will provide precise inventory control. By eliminating overstocking, you can reduce labor costs, improve warehouse efficiency, and ensure employees' time is utilized more effectively.

Excess Stock is Costly

Excessive inventory also leads to increased storage costs. Each item lingering in the warehouse carries maintenance and security costs, which can become a substantial financial burden. Nobody needs inventory sitting in a warehouse, incurring costs, instead of contributing to immediate revenue. In an industry that experiences rapid technological advancements, excess stock can swiftly become obsolete, leaving you stuck with outdated products that are difficult to sell or liquidate, further denting profitability and your bottom line.

With modern inventory management solutions, warehouse space can be optimized and storage costs can be reduced. Management software can track the shelf life and demand for each item in inventory, enabling HVACR businesses to make informed decisions about storage and potentially avoid costly obsolescence.

Lost Profit Cost

When a business carries too much inventory, it has to sell more to clear out space. Discounting items can help to offload excess stock and reduce carrying costs, but it comes at the expense of profit margins. Lowering prices to move excess inventory can erode your profit potential, which can be especially problematic for small businesses or those with limited capital. When cash is tied up in excessive stock, it becomes unavailable for investment in other critical areas of your business, such as marketing or acquiring new equipment. This can hinder growth and limit your competitiveness in the market.

Implementing an automated inventory management system is necessary to combat the five costs associated with excess inventory. Modern contractor management software1 and similar tools provide real-time visibility into a business's inventory, ensuring orders are placed only for what is needed when it's needed. 

These systems offer features such as:
    Demand Forecasting
Demand forecasting allows you to track ebbs and flows so you can predict demand and stock inventory more accurately.
    Order Optimization 
Optimize every facet of performance, productivity, and protection to ensure that the inventory is maximizing your profit, performing well, and keeping you competitive.
    Shelf-life Tracking
Shelf-life tracking allows you to keep track in real-time of how long inventory is sitting before it moves. This ensures product safety, quality, and better inventory management.

Management software solutions can empower SMBs to make informed decisions to reduce costs thereby enhancing overall operational efficiency and profit margins.

Excessive inventory is a serious issue that can impose a significant financial burden on businesses. It results in increased item costs, transportation costs, labor costs, and storage costs, and can lead to diminished profits. However, by adopting modern contractor management software solutions specifically designed for the HVACR industry, inventory management processes can be transformed, and costs can be mitigated, positioning businesses for greater success. Effective inventory management is not only about reducing expenses but also about optimizing resources and ensuring a business remains competitive in a rapidly evolving market. 

Investment in an automated inventory management system will secure a brighter future for your business.

JG van Graan, Director for ThermoGrid, ECI Software Solutions 
JG’s deep HVAC industry roots began as an installation helper and then grew through roles as a technician, service management, and even residential sales. Today, JG is a Director at ECI ThermoGrid , where he helps HVAC companies implement business management software to simplify the management of their businesses by streamlining functions like dispatching, invoicing, and inventory management. 

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