Inventory cost is defined as the total cost of purchasing and carrying inventory over a certain period of time. As there is potential financial risk associated with maintaining inventory, companies must make sure that their inventory costs are properly accounted for, and that they are doing everything possible to make sure there is an appropriate balance between cost and inventory optimization.
In a typical inventory system, there are four main costs associated with keeping inventory; namely, purchasing costs, storage costs, transportation costs and ordering costs. Purchasing costs refer to the cost of acquisition, which includes purchase orders, freight and handling fees, as well as other charges associated with purchasing the inventory. Storage costs refer to the costs of storing and storing inventory, while transportation costs refer to the cost of getting the inventory from the supplier to the customer. Finally, ordering costs refer to the costs associated with placing and managing the orders.
In addition to these costs, there are also the cost of carrying inventory, that is the cost of having inventory in the warehouse and the cost of tracking the inventory levels. These carrying costs are based on the amount of time the inventory is held in the warehouse, and also the cash-flow implications of holding too much or too little inventory; such as potential stock shortages and potential opportunities for excess inventory to be sold off at a discounted rate.
In order to manage inventory costs, companies should first identify the sources of their total cost, and then calculate them to determine how much should be allocated for each cost area. This can be done by taking into account the unit costs of each item in inventory, the overall quantity of inventory maintained and the carrying costs incurred over a certain period of time. The final cost can then be broken down into the individual cost components, such as purchasing, storage and transportation, which allows companies to better understand their costs and optimize their inventory.
To ensure that companies are optimizing their inventory costs, it is important that they have some form of inventory control. This can include regular inventory tracking, physical inspections and data analysis to ensure that the costs of maintaining inventory are appropriate and reasonable. In addition, companies should also consider how their inventory costs are affected by seasonality, and whether it may be more suitable to manage inventory on a seasonal basis so that the cost can be spread out over the course of the year.
It’s also important to look at how inventory is managed in terms of both technological and process optimization. By looking at inventory management processes and technology, companies can identify opportunities to improve their inventory costs. For example, tracking inventory through barcodes and automated sensors can help companies get a better idea of where their inventory is, how fast it is selling and how long it is staying in-stock. This also helps them identify when inventory needs to be reordered and/or adjusted.
In conclusion, inventory cost is an important cost associated with managing inventory and ensuring that companies are maintaining the right level of inventory. By tracking and managing inventory costs, companies can ensure that they are managing their inventory in an effective and efficient manner, and that they are minimizing the risk and cost of holding too much or too little inventory.
