This is the cost a business incurs over a certain period of time, to hold and store its inventory. Businesses use this figure to help them determine how much profit can be made on current inventory. It also helps them find out if there is a need to produce more or less, in order to keep up with expenses or maintain the same income stream. Carrying cost of inventory is often described as a percentage of the inventory value.
This percentage could include taxes, employee costs, depreciation, insurance, cost to keep items in storage, opportunity cost, cost of insuring and replacing items, and cost of capital that help produce income for a business. There are four main components to the carrying cost of inventory; capital cost, storage space cost, inventory service cost, and inventory risk cost. 1. Cost of Capital ( Opportunity cost ) Includes the cost of investments, interest on working capital, taxes on inventory paid, insurance costs and other costs associate with legal liabilities.
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The inventory storage costs as well as cost of capital is dependent upon and varies with the decision of the management to manage inventory in house or through outsource vendor and the third party service providers. 2. Ordering Cost Cost of procurement and inbound logistics cost form a part of Ordering Cost is dependent and varies based on two factor – The cost of ordering excess and the Cost of ordering too less. Both these factors move in opposite directions to each other. Ordering excess quantity will result in carrying cost of inventory.
Whereas ordering less will result in increase of replenishment cost and ordering costs These two above costs together are called Total Stocking Cost. If you plot the order quantity vs the TSC, you will see the graph declining gradually until a certain point after which with every increase in quantity the TSC will proportionately show an increase. This functional analysis and cost implications form the basis of determining the Inventory Procurement decision by answering the two basic fundamental questions – How Much to Order and When to Order.
How much to order is determined by arriving at the Economic Order Quantity or EOQ. 3. Inventory Storage Cost Inventory storage costs typically include Cost of Building Rental and facility maintenance and related costs. Cost of Material Handling Equipment’s, IT Hardware and applications, including cost of purchase, depreciation or rental or lease as the case may be. Further costs include operational costs, consumables, communication costs and utilities, besides the cost of human resources employed in operations as well as management.
Current times, the trend is increasingly in favour of outsourcing the inventory management to third party service provides. For one thing the organizations find that managing inventory operations requires certain core competencies, which may not be inline with their business competencies. They would rather outsource to a supplier who has the required competency than build them in house. Secondly in case of large-scale warehouse operations, the scale of investments may be too huge in terms of cost of building and material handling equipment’s etc.
Besides the project may span over a longer period of several years, thus blocking capital of the company, which can be utilized into more important areas such as R & D, Expansion etc. than by staying invested into the project. Case Study for Amazon. com It is one of the first shopping website launched in the year 1995. At first it started as an online bookstore, later added considerable items to consolidate its position. On an average, added a new product once in every six weeks (from year 1999). Company was negative on spending time in opening stores and warehouse.
Later started maintaining its own warehouse. Each warehouse establishment cost was estimated to be $50 million. They established 10 warehouse in USA by making its brands worth $2 billion public. In early 2001 Amazon decided to outsource its inventory management. The step was in order to increase the profit margin. Stocked in only the popular items and request less popular items to dealers. Distributer shipped the items ordered to the company, when they received goods, they will unpacked it and then shipped to the respective customer. Thus amazon act as trans-shipment center and ensure the entire process of shipping from the distributer to the customer is done efficiently.
Warehousing Cost Case Study For Warehousing Cost We have selected Ekol – one of the leaders in Turkey and Europe as our case study in warehousing cost. Ekol is listed among the pioneering suppliers of integrated logistics services in Turkey and Europe with its distribution centers with more than 400,000 m2 indoor areas in Turkey, 86. 000 square meters of offices in Germany, Italy, Greece, Ukraine, Bosnia and Romania, a fleet of 2000 vehicles, over 4. 000 Turkish and 1. 00 European staff. Ekol provider Specializing in customs clearance, warehouse management, distribution and forwarding. Now a day Warehousing cost become one of important part in Ekol, the business become more widely, handing of stocks are unceasing increasing. Become storage spaces less, cost for operator and cost of risk of industrial accidents while increasing. How Ekol manage this kind of cost? Center, located 40km away from Ankara City Center. One of the Ekol Company using the high technology in operation, Automated Storage and Retrieval system (ASRS) to reducing the warehousing cost they face.
ASRS are robotic system which store a load to pre-determined storage locations and retrieve from these locations, when required. Through this system just only 15% of manpower are using. The layout of ASRS consists of 5 cranes and 300 meters conveyor system, 52,800 Euro pallets storage capacity, has a throughput capacity of 150 pallets inbound and 250 pallets outbound . By support of integrated to automated system, Ekol can increase the storage space by putting the stock at high level rack.
The system will doing retrieved pallet from storage locations and sorted to each shipment chutes without any human touch . According to the Ekol ,one of the special system call “pick by voice” for pick mixed pallets and this system are definitely without any pen, paper or hand terminal requirement. After using this system ,Ekol reduction 60% saving human resource ,40 % saving in space usage and the risk of industrial accidents are inherently reduced ,since all process are done by fully automate.