"A penny saved is a penny earned." We've all heard someone in our lives say this classic adage from Benjamin Franklin, but what does it really mean and how does this apply to corporations? Well, the concept at its core is a simple one, you "earn" money by saving. This concept even today is at the core of many corporations.
No matter the industry, corporations are constantly seeking new ways to increase profitability. This is true no matter the size, location, or industry. The goal of almost every corporation is to please its shareholders, this means earning the shareholders the best possible return on their investments. Cutting costs is usually a surefire method to increase profitability.
Shedding costs as a corporation can be a difficult task, that opens you up to new potential risks. This means when you begin the cutting procedure you cut the areas in your corporation that has become bloated and do not directly affect your core operations. While business analysts and advisers are excellent at finding top-level expenses that can be easily slashed, there is one area that many corporations fail to address.
This mystery expense is known as carrying costs. This name refers to the cost of holding inventory necessary for a company to produce a specific good or service. While at first it may seem like a fairly straight forward expense and should be simple to reduce, several factors make up this figure.
When calculating an organization's carrying costs multiple factors need to be considered. The most common factors when calculating this expense are storage costs, transportation costs, maintenance costs, and wages. When all combined it is easy to see why tackling this expense could yield the best potential results.
Carrying costs typically apply to a couple of different categories of items. In most cases carrying cost refers to the inventory used to produce goods or services. This could be a wide variety of things such as pumps, motors, while also including larger pieces of machinery. These items are not in production and are kept in most cases as backups or spares to be called into production.
Recently these expenses have been seeing increases causing carrying costs to skyrocket, here is how each aspect of this expense is starting to cost you more.
When attempting to calculate a corporation's carrying costs the first factor that must be considered is the storage or warehousing costs. This cost applies whether the warehouse is held on location for the business or outsourced to a 3rd party storage facility or company.
Increased demand for commercial and industrial storage has increased warehousing costs throughout most of the United States. Availability and vacancy rates are at their lowest points since 2000 and 2002 respectively, and rents have been increasing by around 5.6 percent annually over the past seven years.
In Canada, similar trends are emerging as the storage and warehouse industry grows at a rate of around 5.3 percent annually. Despite the industry growth, the number of businesses offering warehouse space in Canada is declining, and those that do stay are bringing in more and more in revenue.
Of course, building in-house storage facilities is always an option for larger corporations. With land values rising and building costs likewise increasing, the cost to build an in-house storage facility is only increasing.
No matter where surplus equipment is housed in storage, the equipment must still be maintained. In addition to ensuring the equipment retains as much value as possible, maintenance is also essential in case a piece of equipment has to be brought back into production operations. Should a like piece of equipment fail, a new facility is opened, or a decommissioned facility be started up again, the equipment has to be in serviceable condition for it to be of any use.
Maintaining equipment is hardly a small expense. Labor costs are one of the largest MRO expenses companies face, especially when paying skilled union workers. As both union wages and benefits costs for union workers continue to rise, this expense will have a greater and greater effect on companies’ bottom lines.
When equipment is needed at a facility, the simple cost of getting the equipment there is also becoming a major factor. Everything from economic growth and e-commerce to traffic jams and driver shortages is causing shipping costs to rise, and the increase has been dramatic and sustained. These factors appear to only grow in the future, and logistics costs will as well.
As storage, labor and logistic costs all increase, the cumulative effect on power generation companies’ MRO expenses isn’t going to go away. Even if one of these factors were to change (and there’s no indication they will), the overall trend shows that MRO is only going to go up. The more surplus equipment a company has, the more harm increased MRO expenses will have on the company’s bottom line.
As illustrated above, several factors contribute to the carrying costs of a corporation's inventory. By better understanding the costs associated with this expense, you can begin to grasp the best ways to manage and reduce the impact of it on your company's bottom line. While there are several band-aid solutions such as reducing labor forces and bartering for better logistic rates when moving inventory, these solutions are normally short term and do not address the bigger challenge.
The best way to look at reducing carrying costs is to look at asset recovery and asset management solutions. What is Asset Recovery? Asset Recovery refers to a strategic tactic of recovering value from unused or surplus assets that your corporation no longer needs. Stated in another way asset recovery is the practice of getting value from and asset that no longer brings your corporation any value. Implementing an asset recovery strategy put simply would encourage your business to reduce the surplus items & equipment from within its inventory,
By reducing the amount of inventory, your business can begin to reduce and better manage its carrying costs. By reducing surplus inventory, you will require less storage space in your warehousing or storage centers. With less inventory in storage, you will then require less time or laborers to maintain and service the equipment that is vital to your operations. Finally, by having less inventory held on hand, you will then need to spend less moving this equipment between facilities as there will be less of a need for this.
NRI Industrial Sales, an industry leader in industrial asset recovery has the expertise and experience needed to properly implement a strategic asset recovery strategy for corporations across the world. Our custom-tailored asset recovery services help your business maximize the return on your industrial assets, while also helping you reduce costly carrying costs. Our core strategies for recovering value from your industrial surplus include:
Our professional industrial asset recovery team has over 10+ years of industry experience. We are a global company that helps corporations reclaim working capital from surplus industrial equipment, as we also help develop strategies to manage and store equipment. We have helped over 80+ clients with their industrial asset recovery efforts by providing cost-effective solutions tailored to their specific operations. Check out our case studies to see our recent success stories.
If you are looking for help in starting or implementing an industrial asset recovery strategy, or you need help with selling your equipment, contact NRI Industrial by calling 1 (855) 709-9813 or emailing: Solutions@NRI-ISD.com.