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What is the Cost of Damaged, Lost or Stolen Inventory?

posted Apr 22, 2011, 9:38 PM by Derek Kottke

Recently I was walking through a warehouse with the owner of a small distributor, when one of his employees brought him a widget that had been damaged by a forklift. The owner told him to trash the widget, and tell accounting to write it off; the value of this widget, $170. This got me thinking, “are they aware of the cost to replace this widget?”

Later, I asked the owner and warehouse person how much they would need in sales to replace this widget; they both said $170. Well, not exactly, let me explain.

In order to replace the cost of the damaged widget, the money must come from the margin of future sales. This company earns a 2% margin for this widget, so they must sell 50 widgets, just to pay for the widget that was damaged! That is $8,500 in additional sales!

$170/.02 = $8,500 in new sales needed to replace damaged widget

$8,500/$170 = 50 widgets

This example doesn’t take into account carrying costs; if carrying costs were 30%, the replacement cost would be $11,050!

This chart illustrates additional sales required to make up for lost/stolen/damaged inventory:

Gross Margin
Value

2%

3%

4%

5%

6%

$ 25$1,250.00$ 833.33$ 625.00$ 500.00$ 416.67
$ 50$2,500.00$1,666.67$1,250.00$1,000.00$ 833.33
$ 100$5,000.00$3,333.33$2,500.00$2,000.00$1,666.67
$ 200$10,000.00$6,666.67$5,000.00$4,000.00$3,333.33
$ 500$25,000.00$16,666.67$12,500.00$10,000.00$8,333.33
$1,000$50,000.00$33,333.33$25,000.00$20,000.00$16,666.67

Again, to breakeven on lost, damaged or stolen inventory, the replacement cost comes from future profits!  How much harder must your sales team work to make up for damaged, lost or stolen inventory?

These little inventory costs that occur daily and weekly add up over time, and at the end of the year, these “little” costs can have a substantial effect on the bottom line.  Therefore, it is important for employees to understand costs associated with inventory, and the impact it has on the company’s financials.