What are inventory costs?
Inventory costs are the costs incurred for keeping stock. We look at the cost components that change when the level of inventory changes. These are the following variable costs:
Opportunity costs: these are the returns you could have achieved if you had invested money into marketing, for example.
Space costs: The more extensive a product, the more space it occupies in the warehouse.
Risk-related costs: The chance that a product will never sell out again.
This percentage only needs to be changed if one of the above factors is significantly different.
We use the costs to make a trade-off between placing an extra order or placing an advance order when you are in danger of running out of stock. An additional order leads to extra ordering costs and an advance order for extra stock costs.
How does my percentage of stock costs affect Optiply?
An average webshop has a percentage of stock costs of 20%. This means that an interest rate of 20% is charged on the stock. The higher the set ratio of stock costs, the less inventory will be placed by Optiply.
💰 Understanding and Setting Inventory Costs
Inventory Costs (also known as Inventory Holding Costs or Stock Costs) represent the costs incurred for keeping stock in your warehouse. Optiply focuses only on the cost components that change when your inventory level changes, as these are the variable costs that impact profitability.
The higher the Inventory Cost percentage you set, the more expensive Optiply calculates it is for you to hold stock.
The Three Components of Inventory Costs
The Inventory Cost percentage is the sum of three main cost factors:
Opportunity Costs (Interest):
Definition: The returns you could have achieved if the money tied up in inventory had been invested elsewhere (e.g., marketing, new product development).
Space Costs:
Definition: The variable costs of warehousing, such as utilities, maintenance, and rent or amortisation, are calculated based on the space occupied. The more extensive a product, the more space (and cost) it requires.
Risk-Related Costs:
Definition: The chance that a product will never sell out again due to obsolescence, spoilage, damage, theft, or product devaluation.
How Inventory Costs Affect Optiply’s Decisions
Optiply uses your set Inventory Cost percentage to make a crucial trade-off, especially when facing high or low stock situations:
Ordering Trade-Off: The system balances the cost of placing an extra purchase order (Ordering Costs) against the cost of holding the resulting inventory (Inventory Costs).
High Inventory Costs: Optiply will minimise stock buffers and recommend ordering more frequently in smaller batches.
Low Inventory Costs: Optiply will allow for larger stock buffers and recommend ordering less frequently in larger batches (as holding the stock is cheap).
Setting the Inventory Cost Percentage
The standard percentage for an average webshop is 20%. This percentage is usually set at the global company level within Optiply's settings.
Note: This percentage only needs to be changed if the factors above (interest rates, space costs, risk) are significantly different for your specific industry or business model.
Here is how you can set the percentage:
Go to Settings.
Navigate to General.
Find the field for Inventory Costs.
Enter the required percentage (e.g., 0.20 for 20%).
Click Save.
❓ Frequently Asked Questions (FAQs)
What is the typical industry percentage for Inventory Costs?
The industry average is typically around 20%. If you are unsure of your exact costs, starting with this 20% default is a reliable standard until you can perform a more precise cost calculation.
How does a high Inventory Cost percentage affect my purchase advice?
A higher percentage tells Optiply to place less inventory on the shelf, reducing your buffer stock. This results in more frequent, smaller orders to save on holding expenses, but slightly increases the risk of stockouts.
If I change this percentage, will my purchase orders change immediately?
Yes. Once you save the new percentage, the system's economic calculations will update, and the next purchase advice generated (or your next review period) will reflect the new, optimal stock levels.
Should I include freight costs in this percentage?
No. Freight and fixed costs (like processing) are Fixed Order Costs, which are set separately on the Supplier Page. Inventory Costs should only reflect the variable cost of holding the item on the shelf.