Inventory Costs

Inventory cost is the cost that is prescribed for holding the goods in stock. This cost includes the warehousing, insurance, taxation, depreciation, capital, obsolescence, and also the shrinkage costs. There are three things that are to be taken into consideration when dealing with inventory cost. They are the ordering cost, carrying cost and the stock out cost. The other names for stock out cost are the shortage cost and the cost of replenishment.

The ordering cost is mainly determined by two factors namely the cost of ordering too less and the cost of ordering excess. These two factors are extremely opposite to each other. The carrying cost of inventory may be the result of ordering excess quantity and the increase in the ordering cost and the replenishment cost would be the result of ordering less. Total stocking cost refers to the two costs mentioned above.  In the ordering cost the inbound logistic cost  and the procurement cost are the main things in the ordering cost. The inventory procurement decision is mainly determined by the cost implications and the functional analysis. There are two important questions which are to be answered. One is when to order and the other one is how much to order. The economic order quantity determines the factors on how much to order.

Second important inventory cost is the carrying cost which is influenced by the maintenance that are involved in the inventory storage. There are two different types of cost are involved in here. The first one is the inventory storage cost and the other one is the cost of capital.

The costs like the building rental and the facility maintenance is included in the inventory storage cost. The cost of purchase, the cost of material handling, the hardware and the applications and other costs like the rental, lease or depreciation are also included in it. Apart from these there are operational costs, communication costs, and also the human resources cost are also taken in to consideration in the management.  The cost of capital is more concerned about the costs of investments, the insurance costs, the taxes on the inventory paid and the interest on the working capital. The decision of the management to manage the inventory through third part service providers or through outsourced vendors plays a vital role in the inventory storage cost and the cost of capital.  The recent trends are extremely in favor of outsourcing to the third party services. The management feels that the vendors outside the organization would be more competent and experienced.