Inventory costs

Inventory costs
See also
Types of logistics costs Direct material Cost structure International logistics Distribution cost Logistics chain IT systems in production management Finished goods inventory SCM system

Inventory costs refer to the expenses incurred by a business in relation to holding and maintaining inventory. Stocks are an integral part of business processes – are present in each of the phases of the business, and by streams of inflow and outflow are subject to renewal. Knowledge of relevant costs that accompany items allows you to optimize inventory control processes and improvement of them. The value of the stocks include:

• cost of creating the inventory
• cost of maintaining the inventory

Costs of creating the inventory include the cost of buying physical inventory and the cost of information processes and related specifically to the purchase of materials. Include procurement costs, non finished production, storage of finished goods in warehouses, sales and goods in trade magazines.

From the point of view of the volatility of inventory costs are different in nature. There are costs of purchase, formed in direct proportion to the size of the purchase, especially expressed in physical units. The costs of information processes and the costs of the purchasing department activities are relatively constant.

There are several types of inventory costs, including:

• Holding or carrying costs: These include costs such as storage, insurance, and security for the inventory.
• Ordering costs: These include expenses such as the cost of placing and processing orders for new inventory.
• Shortage costs: These are costs that a business incurs as a result of not having enough inventory on hand to meet customer demand.
• Obsolescence costs: These are costs associated with inventory that becomes unsellable due to changes in consumer demand or technology.
• Stockout costs: These costs occur when a company runs out of stock and loses sales as a result.
• Financing costs: These costs occur when a business finances its inventory, such as paying interest on a loan used to purchase inventory.

Understanding and managing inventory costs is important for a business to be able to operate efficiently and stay profitable.

See also:

• Types of logistics costs
• Two-tier inventory control
• Inventory management techniques

References

• Ryzin, G. V., & Mahajan, S. (1999). On the relationship between inventory costs and variety benefits in retail assortments. Management Science, 45(11), 1496-1509.
• Tersine, R. J. (1994). Principles of inventory and materials management.