inventory carrying costs

Supply chain businesses are constantly evaluating their operations to identify inefficiencies, process improvements and cost saving opportunities. The one area supply chain operators consistently identify as the best opportunity for improvement is the management of inventory carrying costs. For manufacturers, retailers and similar businesses this can be a complex concept to navigate and evaluate because inventory carrying costs encompass a variety of associated costs. Within the inventory carrying costs category there are 4 main sub-categories including capital costs, storage costs, handling costs and risk costs. Here is a deeper dive into what each of these four cost categories include:

Capital Costs include all of the expenses associated with the purchase of the inventory items being stored. This includes not only the actual purchase price of the product, but any financing fees paid (if not paid for in cash), any interest accrued from financing the inventory purchase and any loan maintenance fees. If evaluating cost savings opportunities in this category the main source of evaluation will likely be your financial institution or source of funding.

Storage Costs include all of the costs related to both the physical infrastructure costs and the supporting expenditures. Typical costs in this category are rent or mortgage fees, property taxes, utilities, facility maintenance and upkeep costs, organizational infrastructure costs (shelving/racking, automation tools) and facility security costs. With more and more facilities shifting towards “going green” this inventory carrying costs category has become an area of focus to many supply chain operations.

Handling Costs are related to any costs required to facilitate safe inventory handling within your warehouse facility. These types of expenditures include any inventory management technology investments such as warehouse management software or mobile automated data collection tools, insurance costs and associated miscellaneous taxes. Many IT managers and Operations managers are upgrading technology now to reduce handling costs moving forward.

Risk Costs encompass a variety of potential costs for warehouse operators, but the most frequently seen include inventory depreciation, write offs/write downs for unsold inventory, shrinkage due to damage and theft and stock out/strategic planning costs. Out-of-stocks, overstocks and returns alone are costing supply chain operations $1.75 trillion annually – this shows significant cost saving opportunity.

To effectively manage inventory carrying costs, SCM businesses are focusing on maintaining accurate inventory levels, cross docking implementation, forecasting, space utilization evaluations and much more. Learn more about reduce inventory carrying costs from Datex expert today at marketing@datexcorp.com or 800.933.2839 ext 243.

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