Inventory Carrying Cost
INVENTORY CARRYING COSTS:
Inventory carrying costs refers to the costs associated with carrying a quantity of stored inventory. This is one of the vital costs that needs to be optimized in any logistics system. It is a well-known fact that the inventory carrying costs is a part of the total logistics costs of the firm. Aspects of these vital costs can be described and evaluated from a variety of perspectives. Knowledge of inventory carrying costs is likely to be important to the success of any business. In general, knowledge of inventory carrying costs constitutes a vital part of management information necessary to optimize the logistics system. However, without specific and comparable measurement of inventory carrying costs relative to a target level, knowledge of inventory carrying costs alone may not be sufficient to contribute either to the optimization of the firm 's logistic system or to its total costs.
The objective of a firm 's logistics system usually is to minimize total costs given a specified level of customer service. The total costs include inventory carrying costs, transportation costs, warehouse throughput costs, order-processing costs, and lot quantity costs. These total costs are dependent upon the configuration of the logistics system. To optimize the system, the component costs must be known and must be comparable. The comparison of these costs is not a simple process.
The lack of a specific methodology by which to measure inventory carrying costs and the lack of an established preferred target level of inventory carrying costs, makes things to look further complicated. From the above, it is clear that several important decisions are, or should be, predicated on knowledge of the firm 's inventory carrying costs. Basic questions concerning inventory strategy can be properly made only after knowledge of the firm 's costs of carrying inventory. Certain important questions that one might want to answer would be: • How much inventory
Inventory carrying costs refers to the costs associated with carrying a quantity of stored inventory. This is one of the vital costs that needs to be optimized in any logistics system. It is a well-known fact that the inventory carrying costs is a part of the total logistics costs of the firm. Aspects of these vital costs can be described and evaluated from a variety of perspectives. Knowledge of inventory carrying costs is likely to be important to the success of any business. In general, knowledge of inventory carrying costs constitutes a vital part of management information necessary to optimize the logistics system. However, without specific and comparable measurement of inventory carrying costs relative to a target level, knowledge of inventory carrying costs alone may not be sufficient to contribute either to the optimization of the firm 's logistic system or to its total costs.
The objective of a firm 's logistics system usually is to minimize total costs given a specified level of customer service. The total costs include inventory carrying costs, transportation costs, warehouse throughput costs, order-processing costs, and lot quantity costs. These total costs are dependent upon the configuration of the logistics system. To optimize the system, the component costs must be known and must be comparable. The comparison of these costs is not a simple process.
The lack of a specific methodology by which to measure inventory carrying costs and the lack of an established preferred target level of inventory carrying costs, makes things to look further complicated. From the above, it is clear that several important decisions are, or should be, predicated on knowledge of the firm 's inventory carrying costs. Basic questions concerning inventory strategy can be properly made only after knowledge of the firm 's costs of carrying inventory. Certain important questions that one might want to answer would be: • How much inventory
References: 1. http://mscmga.ms.ic.ac.uk/jeb/or/invent.html 2. http://www.sbaer.uca.edu/docs - Article on Inventory Carrying Costs 3. http://www.herpersgowling.com/n_lower_inventory_carrying_costs.htm - Small Business Newsletters: Article Titled: “Money saver: Lower Inventory Carrying Costs” 4. Book Titled: “Factory Physics: Foundations of Manufacturing Management” by Wallace J. Hopp & Mark L. Spearman. Publisher: Chicago: Irwin, c1996 (ISBN # 0256154643)