Inventory is one of the most deceptive assets a company has. On the balance sheet it shows up as an asset, but in practice it’s money sitting on shelves: capital that isn’t paying suppliers, payroll, or new investments. And while it sits there, it generates costs almost nobody sees: storage, insurance, shrinkage, obsolescence, and handling hours.
The most frustrating part is that many companies have both problems at once: too much of what doesn’t sell and stockouts of what does. In this article we share seven signs that your inventory management is hurting your margin, how much it may be costing you, and where to start fixing it.
What does it really cost to hold inventory?
A product’s cost doesn’t end when you buy or make it. Keeping it in the warehouse has an inventory carrying cost that, according to inFlow, typically represents 20% to 30% of inventory value per year. It’s made up of four blocks:
| Component | What it includes |
|---|---|
| Capital cost | The money tied up in inventory and what you could earn or save if it were elsewhere (interest, opportunities). |
| Inventory service | Insurance, taxes, administration, systems, and material handling. |
| Risk | Obsolescence, expiration, damage, theft, and shrinkage. |
| Space | Warehouse rent or depreciation, energy, forklifts, and warehouse staff. |
Let’s run the numbers: if your company holds an average of MXN $10 million in inventory and its carrying cost is 25%, you’re paying about MXN $2.5 million a year just to keep it stored. Cutting that inventory by 20% without hurting service would free up MXN $2 million in capital and save around MXN $500,000 a year.
7 signs your inventory is eating into your margin
1. You have high inventory and still frequent stockouts
This is the clearest sign of a management problem. If the warehouse is full but customers are waiting, your inventory isn’t made up of what you need. It usually means purchases are driven by habit, volume discounts, or “what the salesperson asked for,” not by real demand.
2. A significant share of your items hasn’t moved in months
Check how many items (SKUs) haven’t moved in the last 6 or 12 months and how much they’re worth. It’s common to find that 10% to 30% of inventory value is slow-moving or dead stock that will hardly sell at full price.
3. Your inventory turnover drops while sales grow
If you sell more but your inventory grows even faster, turnover (how many times you sell your average inventory in a year) is falling. It’s a sign you’re financing growth with trapped working capital, and that the company will need more and more cash to grow.
4. System and physical count discrepancies are frequent
When physical inventory doesn’t match the system, every decision that depends on that data fails: purchasing, production, delivery promises, and costs. Recurring discrepancies usually point to undisciplined receiving and shipping processes, poorly controlled locations, or shrinkage nobody is recording.
5. Rush orders and express freight are routine
Paying a premium for emergency purchases or rush shipments is a symptom of poor planning. Every emergency erodes margin and usually comes with overtime, rework, and stress in operations.
6. You run clearance sales or obsolescence write-offs every year
If every year-end you’re liquidating goods, destroying expired product, or making accounting adjustments for obsolescence, that cost should be seen for what it is: a preventable loss caused by buying or producing poorly.
7. Nobody owns an inventory metric
Purchasing wants to buy in volume to get discounts, sales wants to have everything so it doesn’t lose orders, and finance wants less inventory to free up cash. If nobody owns the balance between service and invested capital, each department optimizes its own goal and inventory grows by inertia.
If you recognize three or more of these signs, a review of your inventory management will very likely free up working capital and improve your margin within a few months.
The metrics you should review
To move from perception to data, start with these four metrics:
| Metric | How to calculate it | What it tells you |
|---|---|---|
| Inventory turnover | Annual cost of goods sold ÷ Average inventory | How many times a year you “sell” your inventory. Higher is usually better. |
| Days of inventory | 365 ÷ Turnover | How many days of sales you have in storage. |
| Fill rate | Complete orders or lines shipped ÷ Total orders or lines | Whether inventory is doing its job: serving customers. |
| Inventory accuracy | Items with no count discrepancy ÷ Items counted | How reliable the data you decide with is. |
Analyze them by product family or warehouse, not just as an overall average. The average usually hides where the problem is. To see how these metrics fit with the rest of your operation, read our guide to operational KPIs.
Where to start fixing it
- Classify your inventory with an ABC analysis. Typically, a small share of items accounts for most of the value. Those “A” items deserve the tightest control.
- Identify obsolete and slow-moving stock and decide what to do with it: promotions, returns to suppliers, alternative use, or write-off. What matters is to stop paying to store it.
- Set inventory policies by item: safety stock, reorder point, and order quantity, based on real demand and lead times.
- Improve accuracy with cycle counts instead of relying only on the annual physical inventory.
- Assign an owner and targets for turnover, service, and accuracy, and review them monthly with finance, purchasing, and sales.
- Connect inventory with demand planning. The best policies fail if sales forecasts aren’t shared with purchasing and production.
Frequently asked questions about inventory management
What’s a good inventory turnover?
It depends heavily on the industry: a food distributor may turn its inventory dozens of times a year, while a specialized machinery company may turn it two or three times. It’s most useful to compare yourself against your own history and against similar companies in your sector.
Doesn’t reducing inventory increase the risk of running out?
Not necessarily. The goal isn’t less inventory of everything, but the right inventory: more of what sells consistently and much less of what doesn’t move. Done well, total inventory goes down while service levels improve.
Do I need an ERP to manage inventory well?
A good system helps, but it doesn’t solve the problem on its own. Without clear policies, disciplined receiving and shipping processes, and owners with metrics, an ERP just records the same mistakes faster.
Does this only apply to manufacturers?
No. Distributors, retailers, service companies with spare parts or materials, and even clinics and restaurants face the same inventory problems. The principles are the same; how you apply them changes.
Conclusion
Inventory should be a tool to serve your customers, not a deposit of frozen capital. If you have high inventory and stockouts, items that don’t move, recurring rush orders, or constant gaps between the system and the warehouse, your margin is paying the price.
At Total Consulting we help companies design inventory and supply chain policies, controls, and metrics through our Operational Excellence service. If you want to know how much capital you could free up in your operations, schedule a free diagnostic session.
