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inventory carrying costs

Six Sigma – iSixSigma Forums Old Forums General inventory carrying costs

This topic contains 3 replies, has 3 voices, and was last updated by  Adam L Bowden 10 years, 8 months ago.

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  • #51825

    Bonghanoy
    Participant

    Hello,I am trying to understand inventory carrying costs for a class I am taking. In everyones opinion what would you say are some of the main problems in gathering info for calculating inventory carrying costs for a business?

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    #180898

    Nolan
    Participant

    First look at the elements of this cost:
    1. Invested capital
    2. Cost of storage space
    3. Risk of spoilage (outdated deteriorated, stolen, etc.)
    The difficulty of monetarizing these is the following:
    1. Challenge: Getting your firm’s marginal cost of capital out of Finance; if you accomplish that then apply that interest cost to the capital cost of the lesser inventory dollar amount to establish an ongoing interest cost savings. However the benefit you don’t capture here is “What does freeing this capital do for your business in other arenas? Can you expand? Does your credit rating and therefore borrowing costs improve? Does the market value this and increase stock prices? Many issues.
    2. Calculate how much less space you need to store stuff. Challenge: Is this a marginal cost? Even if you don’t need the space, is it a variable cost? Can you get rid of it? If you can then calculate the lease payment savings, operating costs, etc.
    3. Challenge: Spoilage costs are very dificult to calculate. What inventory becomes unusable because of time in the warehouse – that part is pretty straightforward. But, do you really know what spoils or do you use it anyway and create warranty issues? Do you know what’s stolen? Do you know the impact of technological changes that devalue your inventory. This is a complex subject.
    So there you go, it’s tricky.
     

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    #180902

    Bonghanoy
    Participant

    Thank you for explaining it to me; I was having a hard time putting it all together but I was thinking of some of the areas in the right manner, which is a good sign. It is very complex.

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    #180928

    Adam L Bowden
    Participant

    The carrying costs are upto the CFO/Controller and how they wish to
    allocate costs etc.
    The rate will be between “base” plus 2% and 25% and I’ve even seen
    33%. Adam

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