In the current state of the aviation industry, items that didn’t get much attention when things were good, are now being scrutinized. 

One area that deserves attention is your surplus aircraft part inventory. 

The real cost of carrying inventory is much more than your initial purchase price. 

The carrying costs of inventory (which range up to 30% of inventory value on hand) contain hidden fees. 

Often overlooked areas are the total cost of purchasing items, storing, handling, and accounting for depreciation if those items don’t move off the inventory shelves. 

It’s estimated that major legacy airlines have $1.5-$2 billion of inventory that turns at fewer than 1.7 times/year.

For example, a company might express the holding costs of 20%. 

If the company has $10,000,000 of inventory cost, its cost of holding that inventory is roughly $2,000,000 per year. 

How operations end-up with excess inventory is the subject of another post, a much longer one at that.

But let’s look at where these costs come from so you can prepare your operation for success. 

Write Offs

If your inventory doesn’t sell or consumed as you anticipated, you may find that the aircraft material looses value or becomes obsolete. 

Another cost is shrinkage or the loss of inventory. 

Shrinkage usually happens due to employee theft, but it can also be caused by administrative error or damage in transit. 

Capital Costs

The cost of capital, which is the most significant portion of your total carrying costs, refers to both...

- financing charges (money spent, interest paid, and interest lost once that cash becomes inventory).

- opportunity cost of the money spent (your money is invested in unsold inventory rather than other areas of your operation).

When you purchase inventory, liquid cash becomes tied up until you recoup it by consuming the material in maintenance activities or selling your surplus, a process that takes vital capital out of your business operation. 

Storage Costs

Aircraft part storage cost covers everything associated with keeping your inventory organized in one place, protected, safe, and in good condition. 

Storage costs include rent, utilities, security, and upkeep. 

Most of these costs come in the form of wages. 

Service Costs

The cost of servicing your inventory means protecting it from issues such as theft or workplace accidents. 

Insurance is used if there’s a natural disaster, theft, or accidents occur. 

Taxes are paid on the total inventory value you keep; the higher the value, the more taxes you pay. 

And finally, to keep track of your inventory, it’s likely you’re using an inventory management system to ensure no stock goes missing.

Also, you can see, and may very well know; inventory is a costly endeavor if it’s not optimized. 

What’s even more costly, is excess inventory. If you’d like to discuss ways to turn your surplus into revenue, click here.