Do you hold surplus inventory for your aircraft material needs?
This unnecessary buildup occurs when you order inventory in preparation for near term consumption.
When that consumption never occurs. Voila! Surplus inventory builds up.
If left unattended, It's like a giant weight, smothering your financial results.
The biggest impact is…
Holding costs. A CFOs worst nightmare.
"Holding cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost, and inventory costs related to perishability, shrinkage (theft) and insurance. Holding cost also includes the opportunity cost of reduced responsiveness to customers’ changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes."
All that surplus inventory you hold is just another expense. An unnecessary one.
The most obvious holding costs include:
- Warehouse space (rent for the required space)
- Equipment, materials, and labor to upkeep and operate the warehouse
- Required maintenance or operating costs for the surplus, such as utilities for a surplus building
- Insurance, security, taxes and interest on money invested in the inventory and space
- Some stored items become obsolete before they are used, reducing their contribution to revenue while having no effect on their holding cost
- Some are damaged by handling, weather, or other mechanisms. Some items are lost through mishandling, poor record keeping, or theft, a category euphemistically called shrinkage.)
- Costs for record keeping and physical stocktaking of inventory
- Environmental concerns
- Holding cost also includes the capital opportunity cost
The financial impact of holding costs to you operation.
Holding costs are expressed as a cost of holding one item of inventory in stock for one year.
This is either expressed as a percentage or fair market value of the inventory, a dollar amount.
Let’s say your holding costs of an item is 20% per year. You currently have $1,000,000 of surplus expendable and rotable inventory. Your potential holding costs of that inventory is $200,000, per year.
Yes. Per year!
Holding costs are estimated at approximately 15-45% of the asset’s actual value (FMV) per year.
Studies have been done that show the average holding cost for surplus assets and stores inventories was 20% of the book/FMV value.
Your operation may be higher than this.
Determine if there are any other costs you can think of that are incurred simply by being in possession of an item. If you can think of any, treat them as holding costs.
As you can see, holding costs is a real deadweight. It’s a burden to your operations results and you must get rid of it as soon as you can.