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There are various cost associated with inventory management which effects on overall process of materials management.
There are three main type, which are;
1) Purchase cost
2) Ordering cost
3) carrying cost
Hybrid costs are the costs of a variety of containing variable and fixed or semi-variable cost components; for mixed and difficult to assess the costs; where varying response to fluctuations in the volume of transactions. Vary depending on market conditions and the level of activity and carry on as costs an extra level of activity
The following costs are associated with inventories (other than procurement cost)
1. Holding (carrying cost); Cost of storage facilities, handling, insurance etc.
2. Set up cost (cost of placing in warehouse and associated recording cost)
3. Ordering cost :( Managerial and clerical cost to make a purchase order
4. Shortage cost or stock out cost
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Inventory involved the following cost
1) Warehouse rent cost
2)Labor and handling cost
3) Cost of capital tied up in inventory
4) Scrap and obsolescence cost
5) Ordering cost
6) Staff salary
7) Other administrative cost inured in operating a warehouse - Electricity / fuel / Insurance / taxes.
The Landed cost will be calculated based on Freight Value, Insurance cost, handling charges, transportation charges, documentation charges, exchange value, and warehouse storage charges if any.
Inventory costs are basically categorized into three headings:
Detailed explanations from the subject experts. Thank you
Hello Team,
Inventory procurement, storage and management is associated with huge costs associated with each these functions.
Inventory costs are basically categorized into three headings:
Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering Cost is dependent and varies based on two factors - 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. Where as 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.
Inventory storage and maintenance involves various types of costs namely:
Inventory carrying involves Inventory storage and management either using in house facilities or external warehouses owned and managed by third party vendors. In both cases, inventory management and process involves extensive use of Building, Material Handling Equipment, IT Software applications and Hardware Equipment coupled managed by Operations and Management Staff resources.
Inventory storage costs typically include Cost of Building Rental and facility maintenance and related costs. Cost of Material Handling Equipment, 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.
Includes the costs of investments, interest on working capital, taxes on inventory paid, insurance costs and other costs associate with legal liabilities
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 outsourced vendors and third party service providers.
Current times, the trend is increasingly in favor 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 in line 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 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.
Regards,
Saiyid
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