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