Carrying Cost of Inventory

Carrying Cost of Inventory %: Input your annual carrying cost percentage. Carrying costs are typically between 24% to 48% per year. If you don’t know your Inventory Carrying Cost, the following will assist you in calculating it. An explanation for each item is below the chart. Inventory Carrying Costs typically include the following components: 1) Cost of Capital: Your blended cost of corporate equity and debt financing. Manufacturing companies are generally between 7 – 12% 2) Cost of Space: The cost of the space (and utilities) tied up holding inventory. The text books say 2-5% 3) Administrative Costs: People and systems costs required to manage the inventory. It includes warehouse supervision, cycle counting, inventory transaction processing, etc. 3-6% 4) Obsolescence and Deterioration: Scrap and rework costs of inventory that is no longer “active”: Customer cancelation, product design change, damage and corrosion, etc. 5) Insurance / Taxes: 3-9% 6) Material Handling: With lots of inventory we are always moving something to get to the item we actually need. 2-5% Some companies also add the costs of all stock keeping, i.e. the cost of putting up and picking material. 7) The Impact on Quality: The more inventory, the more handling damage, scrap, sorting, and rework required. And inventory delays discovery, thereby making it more difficult to uncover the real root cause. 8) Lead Time: There is a correlation between WIP inventory and response time: The more items in WIP, the longer it takes to move an item through. This can have a n egative impact on market share / price due to competitive disadvantage in responsiveness. 9) Shrinkage: The cost of misplaced, lost, or stolen material / parts. 10) Opportunity Costs: What could we have earned if we had invested this money? 11) Innovation Delay: Time to Market is critical today. Inventory of ol d parts or finished goods can delay new product introduction while we wait to use up the old parts before implementing the new design.

Carrying Cost of Inventory

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