The True Cost of Holding Inventory - How Shipping Delays Impact Your Bottom Line

Table of Contents:

What Contributes to Holding Costs?
How to Calculate Holding Cost
Impact of Shipping Delays on Holding Cost
What Causes Shipping Delays?
How Shippo Can Help You Save on Holding Costs

Are shipping delays holding back your business? Delayed shipping doesn’t just frustrate customers—it can also quietly inflate your inventory holding costs, draining your resources and eroding your bottom line.

Inventory holding costs—fees for storing unsold stock—can add up quickly, but with careful management, they can be kept in check. However, when shipping delays occur, these costs can skyrocket, keeping goods in warehouses longer, increasing the risk of theft or damage, and tying up valuable capital.

Understanding and controlling these costs is crucial in the competitive e-commerce sector. In this article, we explore how to calculate holding costs using the inventory carrying cost formula and how Shippo can help you mitigate the impact of shipping delays with more cost-effective solutions. 

What Contributes to Holding Costs?

 Holding inventory refers to stocking goods that your business does not use immediately.

When you hold onto this inventory, you will incur a range of expenses, including: 

• Warehouse rent
• Utilities
• Taxes
• Labor
• Transportation
• Insurance
• Shrinkage due to theft or damages
• Deprecating value of the goods
• Lost opportunity costs

 For instance, If you typically sell 40 units of a specific sweater each month but have 200 in stock, you're incurring holding costs on the extra 160 units, which ties up valuable cash flow. These costs can be especially detrimental for small businesses with limited cash flow. Accurately calculating these costs is crucial to determining whether or not you're making sound financial and operational decisions.

To effectively manage and reduce holding costs, it’s important to calculate them accurately. 

How to Calculate Holding Cost

The inventory holding cost formula can help you determine the cost for the average amount of inventory held during any given period.

Inventory Holding Cost = (Total Storage + Labor + Depreciation + Lost Opportunity Costs) / Total Annual Inventory Value

The following example illustrates how quickly holding costs can accumulate, especially when shipping delays extend storage times.

Example:

If your company has a warehouse to store your all-natural beauty products, you'll first have to determine your annual costs associated with storage:

• Storage Costs = $10,000
• Labor Costs = $25,000
• Depreciation Costs = $5,000
• Lost Opportunity Costs = $8,000
• Total = $48,000

If your annual inventory value is $120,000, then your Inventory Holding Cost = 40%.

Impact of Shipping Delays on Holding Cost

The longer your inventory is held up due to shipping delays, the more your holding costs will increase. Delayed shipments lead to prolonged storage times, resulting in higher warehouse fees, increased risk of product damage or shrinkage, and additional labor costs. This not only inflates your holding costs but also ties up capital that could be used more effectively elsewhere, ultimately impacting your profitability.

What Causes Shipping Delays?

Many factors can be considered causes of shipping delays, ranging from logistical challenges to external issues such as:

• Port Congestion: Overcrowded ports lead to delays in the unloading and processing of shipments
• Customs Clearance: Documentation errors and regulatory changes can cause goods to get stalled at the borders
• Logistical Bottlenecks: Vehicle breakdowns, diverted routes, or storage capacity constraints at the warehouse can disrupt the flow of a shipment

How Shippo Can Help You Save on Holding Costs

Shippo is a comprehensive shipping platform designed to streamline e-commerce and enterprise-level shipping processes. By improving shipping efficiency, Shippo directly reduces the holding costs that can eat into your profits. Here’s how:

By leveraging Shippo's platform, businesses can mitigate the holding costs associated with shipping delays through the following benefits:

• Enhanced Efficiency: Shippo's automation, analytics, and real-time shipment tracking tools empower you to optimize your shipping operations, reducing delays and the associated storage costs.
• Reduced Costs: Access discounted shipping rates and expedite deliveries for more timely fulfillment, minimizing the time your inventory spends in storage and lowering holding costs.
• Inventory Optimization: Faster and more reliable shipping methods can help you better manage your inventory, reducing excess stock and its associated costs.
• Shipping Insurance: Safeguard your shipments with Shippo Total Protection Insurance minimizing potential losses from damage or shrinkage.

Understanding and managing holding costs is key to optimizing your operations. With Shippo, you can streamline your logistics, reduce delays, and keep your holding costs under control, giving your business a competitive edge.