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Carrying Inventory's Mysterious Cost

Carrying Inventory's Mysterious Cost

The cost of sustaining your average inventory investment of inventory in your warehouse, storeroom, stockroom, or other facility where you stock raw materials or completed goods is known as the carrying cost of inventory. 

How much does it cost you to keep goods on hand?

Putting away stock receipts and moving stuff throughout the warehouse costs money. 

How much time do these activities take up for your employees?

Rent and utilities for the area of your warehouse where stock inventory is stored.

Inventory insurance and taxes You must insure it if it is in your warehouse, and it may be subject to tax.

Physical inventory and cycle counting are two types of inventory. 

The longer it takes to count the materials in your warehouse, the longer it takes to count them.

Inventory shrinkage and obsolescence are both problems. 

The greater the amount of stuff in your warehouse, the greater the risk of shrinkage and obsolescence. After all, stealing something that isn't there is difficult!

The money invested in inventories has an opportunity cost. How much money could you make if you put the money you're investing in inventory into something more traditional (like treasury bills)? How much interest are you currently paying the bank on your merchandise if you're financing it?

By dividing the total of these expenses (together with the opportunity cost) by the average inventory value, the carrying cost percentage is derived. It's the amount of money required to keep one dollar's worth of goods for a year.

For years, many industry advisors have argued that calculating your company's true carrying cost in a reasonable length of time is too complicated, and that you should instead employ a rule of thumb like "current prime rate plus 20%." 

A recent suggestion from an inventory "expert" was to change your carrying cost percentage so that the economic order quantity formula offers "acceptable" reorder quantities.

This is a backwards approach of thinking. The economic order quantity formula is used to get the lowest total cost reorder quantity (also known as your "best buy quantity") based on the cost of carrying inventory. If it is less expensive to keep inventory in your warehouse, you will stock more. 

If your carrying expenses are significant, you'll want to store just enough inventory in your warehouse to ensure that client service is not jeopardized. Buying the quantity that will reduce your company's overall cost of inventory will not be as simple as guessing at your carrying cost.

Using an estimated carrying cost, on the other hand, does not assist you in identifying potential areas for improvement in your warehouse operations. 

It is critical to reduce operating expenses and boost productivity wherever possible in these days of rising competition, weaker margins, and growing customer demand for product availability. 

You can find areas for improvement by reviewing the various components of the inventory carrying cost and comparing the numbers to those of other companies in your sector and location.

With this in mind, EIM would like to assist you in calculating your inventory carrying costs. We will compute your carrying cost and offer you a comparison of your responses to others in your location and industry if you print and fill out the accompanying questionnaire and send it to us through email, mail, or fax. 

This service is free as long as you agree to allow us to save your information in our database. Please keep in mind that all responses are kept private. The information we provide to other businesses will not include your company's name or location.

Even if you don't complete the questionnaire, have a look at it because it covers most (if not all) of the aspects you'll need to consider when calculating your personal inventory carrying cost.

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