Purchase price is only one part of inventory cost. The real cost of inventory also includes the time, space, labor, technology, supplier management, stockout risk, and carrying costs required to own and manage those items over time.
Unexpected costs are common, and inventory management is no exception. Getting control of your bottom line starts with understanding the often overlooked expenses that can quietly reduce profitability.
Just like concert tickets or takeout orders, where fees and charges can quickly increase the initial price, the hidden costs of inventory can add up over time. These costs are not always obvious, but if overlooked, they can eat into your margins and impact profitability.
With inventory management, the extra costs can be harder to identify because they are spread across purchasing, receiving, storage, labor, shrinkage, stockouts, and supplier management. Not only is the purchase price of your inventory important, but there are also substantial costs associated with owning and managing that inventory.
Understanding the Total Cost of Ownership (TCO) is key to managing these expenses. Let’s look at the major elements of inventory TCO and how to keep them in check.
What Is Total Cost of Ownership in Inventory Management?
Total Cost of Ownership, or TCO, is the full cost of owning and managing inventory beyond the initial purchase price. In inventory management, TCO includes buying costs, holding and carrying costs, labor, equipment, technology, shrinkage, obsolescence, stockouts, and other hidden costs that affect profitability.
The costs of procuring and managing inventory generally fall into two major buckets:
Buying costs include everything from the time spent locating merchandise, shopping, and negotiating prices to paperwork, shipping and receiving, handling errors, and processing returns.
Holding and carrying costs include inventory-related expenses such as warehouse space, financing, inventory control, shrinkage, taxes, insurance, and general overhead.
These costs are reflected in the Total Cost of Ownership: what it costs to own and manage stock once it is in your possession.
What Costs Are Included in Inventory TCO?
TCO can be broken down further into three components:
| TCO Component | What It Includes |
|---|---|
| Direct Costs | Costs associated with acquiring, handling, and storing inventory. |
| Indirect Costs | Costs of labor, equipment, and technology, including ongoing maintenance and updates. |
| Hidden Costs | Costs tied to damaged items, theft, shrinkage, obsolete stock, stockouts, and inefficient processes. |
Hidden Inventory Costs That Affect Total Cost of Ownership
With that in mind, here are the most important cost areas to assess when calculating the true TCO of your inventory.
Carrying Costs
The more stock you keep on your own premises, the more capital is tied up in inventory. This limits financial flexibility and can also lead to substantial inventory financing costs, including loan maintenance fees and interest.
That is only the beginning. The larger your inventory, the higher the associated storage costs. This 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 help lower carrying costs because the distributor holds the inventory until you need it. A strong industry-focused supplier has access to a large number of inventory items, which can give you confidence that the required parts will be available when needed.
This is especially true if the distributor offers Proactive Inventory Stocking Agreements, such as MCE makes available through its VMI program that positions dedicated inventory in an MCE warehouse.
Order and Setup Costs
Keeping inventory leaner and placing more frequent orders on a Just-In-Time basis is one way to reduce inventory storage costs. But if you are not careful, the volume of orders and frequent restocking can become cumbersome.
The answer 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%
Excessive Inventory Locations and Suppliers
Inefficient inventory operations can have significant costs, especially when inventory is spread out and managed through multiple suppliers.
MCE recommended consolidation. By leveraging its extensive catalog of parts, MCE helped a client reduce their number of suppliers from nearly 100 to just three, streamlining the ordering process and reorganizing their warehouse layout.
These improvements led to significant cost savings, including reduced logistical expenses, better inventory tracking, and lower supplier management fees.
>> How MCE helped car wash equipment manufacturer reduce logistical expenses
Stockout Costs
Although maintaining large amounts of stock can balloon inventory costs, not having enough stock to meet demand can also affect customer satisfaction and create potential lost sales.
The key is partnering with a supplier like MCE who can meet your needs in a timely way while relieving you of the burden of carrying safety stock. MCE’s VMI program helps maintain optimal inventory levels across your facility.
>> How MCE's VMI program increased efficiency and reduced stockouts at aerospace manufacturer
Obsolescence and Shrinkage
Holding excess inventory increases the risk of stock becoming unsellable. It also requires more oversight to prevent theft, damage, or clerical errors, which can increase personnel costs.
Opportunity Costs
Overstocking limits capital for other business investments, reducing agility and response time to market shifts.
Total Value of MCE Inventory Management: Tracking Your Spend with MCE Scorecard
MCE tracks the value delivered to customers with an annual scorecard, aiming for a value return range of 8–12%.
For example, one customer with $1.3M in MRO inventory spend in 2024 saw a 15.4% return through services like:
- Onsite inventory tracking by an MCE rep
- Proactive stocking of critical parts
- Dedicated deliveries and Hot Shot services
- Inventory tracking app to optimize levels
- Purchase order consolidation
- Freeing up warehouse space via MCE storage
- Access to Turnaround trailers during plant maintenance
It is not just a scorecard. It is a way for customers to identify and capture additional value from MCE solutions.
How MCE Can Help Reduce Inventory TCO
MCE’s digital tracking and barcoding improve inventory accuracy and reduce hidden costs. MCE’s flexible solutions, including VMI for larger clients and CMI for smaller ones, help customers pay for the service level they need.
By customizing stocking agreements based on usage and lead time, MCE helps prevent overstocking and reduce emergency order costs.
Interested in learning more about how MCE can help you control inventory costs? Contact us for an assessment and find the right solution to manage inventory effectively while increasing your margins.