Unexpected costs are common, and inventory management is no exception. Getting control of your bottom line lies in understanding and paying attention to often overlooked expenses.
Just like concert tickets or takeout orders, where fees and charges quickly double the initial price, the hidden costs of inventory can add up over time. These costs aren’t always obvious, but if overlooked, they can eat into your margins and impact profitability.
With inventory management, the extra costs can be harder to suss out, because they’re spread over time. Not only is the purchase price of your inventory important, there are also substantial costs associated with owning and managing that inventory that add up to the total cost of inventory. And if you’re not conscious and careful about them, they can reduce your profitability.
Understanding the Total Cost of Ownership (TCO) is key to managing these expenses. Let’s explore the major elements of TCO and how to keep them in check.
What is the total cost of ownership in procurement (TCO)?
And what costs are included? The costs of procuring inventory fall into two separate buckets:
Buying costs - include everything from the time spent locating merchandise, or shopping and negotiating prices, to paperwork, shipping and receiving, and handling errors and returns.
Holding and carrying costs - include everything inventory-related, from the warehouse space to financing, inventory control and shrinkage, and general overhead costs like taxes and insurance.
These costs are reflected in the Total Cost of Ownership: what it costs you to own and manage your stock once it’s in your possession.
TCO can be broken down further into three components:
- Direct Costs: These include the costs associated with acquiring, handling, and storing your inventory.
- Indirect Costs: These include the costs of labor, equipment, and technology — not just hiring and acquiring, but the ongoing expenses of maintenance and staying up to date.
- Hidden Costs: These include everything from loss of items due to damage or theft, as well as stock that becomes obsolete.
Shining a Light on the True Costs of Ownership in Procurement
With that in mind, here’s a breakdown of the most important elements you need to assess in order to understand your true TCO.
1. Carrying Costs. The more stock on your own premises, the more capital is tied up in inventory, which limits your financial maneuverability. This can also lead to substantial inventory financing costs, including loan maintenance fees and interest.But that’s just the beginning — because the larger your inventory, the higher the associated storage costs. That includes the cost of buying or leasing warehouse space and everything associated with it, from climate control and security systems to equipment like forklifts, pallets, and bins.
A strong distributor relationship can really help lower your carrying costs because the distributor is holding the inventory until you need it. A strong industry-focused supplier has access to a large number of inventory items, which will allow you to be confident in knowing they’ll have the required parts when needed.
This is especially true if the distributor offers Proactive Inventory Stocking Agreements, such as MCE makes available through their VMI program that positions dedicated inventory in an MCE warehouse.
2. Order and Setup Costs. Keeping your inventory leaner and placing more frequent orders on a Just-In-Time basis is one way to reduce associated the costs of inventory storage. But if you’re not careful, the volume of orders and frequent restocking can be cumbersome, requiring a lot of time and repetitive efforts from your team members.The answer here lies in automation. MCE uses inventory management technology like Clear Spider to streamline and simplify ordering processes — in some cases reducing an eight-step process down to as few as three. MCE's tech-enabled approach also reduces manual errors, which helps avoid indirect costs linked to order inaccuracies.
>> How MCE helped one customer reduce inventory management time by 80%
3. Excessive Inventory Locations and Suppliers. Inefficient inventory operations can have significant costs, especially when inventory is spread out and managed through multiple suppliers. MCE worked with a client who manufactured car wash equipment and faced challenges with time-consuming ordering processes and inventory scattered across a large warehouse. This lack of efficiency made managing their inventory more complex and costly.To address these issues, MCE recommended consolidation. By leveraging its extensive catalog of parts, MCE helped the client reduce their number of suppliers from nearly 100 to just three, streamlining the ordering process. Additionally, MCE analyzed the client’s inventory picking system and reorganized their warehouse layout, consolidating parts into two racks across six shelves, which saved staff time and reduced unnecessary movement.
These improvements led to significant cost savings, including reduced logistical expenses, better inventory tracking, and lower supplier management fees. Ultimately, the client benefited from a more manageable and predictable Total Cost of Ownership (TCO).
>> How MCE helped car wash equipment manufacturer reduce logistical expenses
4. Stockout Costs. Although maintaining large amounts of stock can balloon your inventory costs, when you don’t have enough stock to meet demand, there’s an impact on customer satisfaction as well as the possibility of delayed production and lost sales.The key here is to partner with a supplier like MCE who can meet your needs on a timely basis, while relieving you of the burden of carrying a lot of safety stock. MCEs Vendor Managed Inventory program can help establish dynamic minimum and maximum product levels for product replenishment, ensuring the right products are always stocked throughout the facility, exactly where your team members need them.
>> How MCEs VMI program increased efficiency and reduced stockouts at aerospace manufacturing company
5. Obsolescence and Shrinkage. Another risk of holding excess inventory is that if demand falls short of expectations, you could end up with stock that deteriorates or loses value over time, potentially becoming unsellable and leading to a loss.A larger inventory also requires more resources to monitor and protect it from theft, damage, or clerical errors. This often means a bigger team is needed, bringing additional costs for recruitment, training, and employee benefits.
6. Opportunity Costs. In addition to missing out on the appeal of newer items when you're overstocked with aging inventory, tying up too much capital in stock can limit your ability to make other essential investments. This can reduce your business's agility and ability to respond quickly to new opportunities or challenges.Total Value of MCE Inventory Management: Tracking Your Spend with MCE Scorecard
MCE is cognizant of the trust customers place in us as a supplier and service provider. We understand that our customers leverage one thing with us and our competitors, their spend. That’s why we actively track the value that we bring to the partnership with an annual scorecard. We want to make sure our customers feel good about the value that they're getting with each dollar spent at MCE. We consider a good value range of return is between 8-12%.
For example, in the following scorecard, a company had a spend of $1,300,000 for their MRO inventory in 2024. They realized a return of 15.4% of valued returned using the inventory services MCE provides, such as:
- Onsite inventory tracking by an MCE rep
- Proactive stocking of critical parts,
- Dedicated deliveries and Hot Shot services as needed to their facility
- Inventory tracking app to optimize inventory levels
- Purchase order consolidation
- Freeing up warehouse space with dedicated warehouse space at MCE
- Access to Turnaround trailers for critical inventory during plant maintenance
It's not just a scorecard for how we're performing as a supplier, but a way to show our customers ways to capitalize on the many solutions MCE provides to gain additional value.
How MCE Can Help You Rein in Your TCO
Enhanced visibility is a key benefit of MCE's solutions. By using barcoding and digital tracking, MCE helps clients maintain more accurate and organized inventories. This system reduces hidden costs from misplaced or misidentified items, minimizes unplanned downtime, and ensures that essential parts are always available. Efficient inventory organization directly impacts Total Cost of Ownership (TCO) by reducing waste and improving operational flow.
Choosing the right stocking approach is essential for each customer. MCE’s inventory solutions are scalable and adaptable to meet the specific needs of clients. For larger customers, Vendor Managed Inventory (VMI) is typically the most efficient and streamlined option. However, MCE also offers Customer Managed Inventory (CMI) for smaller clients, providing a cost-effective solution while still benefiting from advanced inventory management technology. This flexibility ensures clients only pay for the level of service they require.
MCE tailors stocking agreements to each customer's usage and lead time requirements to avoid overstocking or stockouts. By calculating weekly usage and considering lead times, MCE ensures inventory levels align with real-time needs without locking up capital in excess stock, ultimately lowering TCO. Holding customer-specific inventory reserves also reduces costs associated with downtime or emergency orders.
MCE’s approach to inventory management is tailored to meet the unique needs of each customer. By customizing services to fit each client’s requirements, MCE focuses on ensuring inventory accuracy, optimizing stock levels, and improving process efficiency.
Interested in learning more about how MCE can help you control your inventory costs? Contact us for a free assessment and we’ll help you find the right solution to manage inventory effectively while increasing your margins.