Chapter 9b: Inventory Management

Four Major Components of Inventory Carrying Costs

1- Capital Costs 2- Storage Space 3- Inventory Service Cost 4-Inventory Risk

The higher the service level requirements (lower stock-out rate)

The higher the inventory level

Safety Stock

refers to additional inventory used in minimize the possibility of a stock out

Private Warehousing

refers to storage that is owned, many storage space costs are fixed and do not vary. ( such as buildings, utilities, taxes)

Capital Costs

Refers to the costs of capital (money) tied up in inventory and the resulting lost opportunity form investing that capital elsewhere

Inventory Carrying Cost

are those costs that are incurred by inventory at rest and waiting to be used

Carrying cost increases,

as the size (units) of the order increases

Order cost decreases

as the size order (units) increases

Storage Space Costs

includes handling costs associated with moving products into and out of inventory as well as storage costs such as rent, heating, and lighting

Inventory Risk

includes inventory value that might decline for reasons beyond an organization's control. Associated with obsolescence, damage, pilferage, and other risks

Total Cost

is the cost associated with processing and making extra shipment

Public Warehousing

refers to storage that is rented on a month to month basis, costs early directly with the level of stored inventory

Ordering Costs

refers to the expense of placing an order for additional inventory

Variable Costs

refits to expenses incurred each time an organization modifies a production or assembly Line to produce a different item for inventory

Inventory Service Cost

Service cost includes insurance and tax