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Holding Cost

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  • #48619

    Airworthy Amy
    Participant

    Does anyone have a formula that can be used to calculate inventory holding cost?
    Thanks!
    Amy

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    #164548

    Brandon
    Participant

    Here’s what I’ve used; could be others:
    Calculate the amount of excess inventory (unless you are looking for total inventory carrying costs, then use total inventory).
    From your Financiail Dept get the “Cost of Capital” for your firm – I won’t go into that – they should know – get back to me if they don’t (and get another CFO!!). (Note: For excess inventory carrying costs you could use the firm’s “marginal” cost of capital – they should know that as well.)
    Multiply the excess (or total) inventory dollar value by either of the costs of capital described above.
    That will yield your ANNUAL cost for inventory carry. If you want to apply present value to that annual savings then you will have to pick a time period over which you want to value that annual savings and present value it with your cost of capital.
    PS: what does the Airworthy mean? Are you a pilot?

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    #164551

    Airworthy Amy
    Participant

    No – I work for a small company called Airworthy Aerospace – a FAA repair station.  We are currently trying to identify obsolte inventory and calculate holding cost to assist us in determining what, in fact, is obsolete and should be sold/disposed of/etc.
    Thanks Brandon!  Let me know if you have any other thoughts.
     

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    #164554

    Heartland
    Participant

    Airworthy
    You should also consider the cost of storage space if the material in question is not stored in buildings owned by your company.  If, for example, you pay a monthly fee per pallet or you can eliminate some leased storage that cost should also be added to the number calculated using the information from the previous post.
     
    Heartland
     

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    #164561

    Brandon
    Participant

    Ah, Heartland – great thought. – storage space costs, insurance, transport, security, varmint control….there are a bunch of things that don’t quickly come to mind.

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