Inventory and related cost

Kumar Utkarsh raj PGDM retail

A list of what you have. In company accounts, inventory usually refers to the value of stocks, as distinct from fixed assets. An inventory would include items which are held for sale in the ordinary course of business or which are in the process of production for the purpose of sale, or which are to be used in the production of goods or services which will be for sale.

Types of Inventories
y Raw materials y Components (purchased parts) y Partially completed goods: work in progress (WIP) y Finished Goods y M.R.O. (Maintenance, Repairs and Operating supplies)

Independent versus dependent demand

Functions of Inventory
y To meet anticipated demand (make-to-stock) y In-Transit inventory: goods being transported y To take advantage of order cycles or to take advantage of

quantity discounts (cycle stock)
y To protect against stock-outs (safety stocks) y To smooth production requirements (seasonal inventories) y To help hedge against price increases (speculative


Inventory Related Costs
y Holding (carrying) Cost y Ordering (set-up) Cost y Shortage Cost

Holding (Carrying) Cost
y Total holding cost is composed of a multitude of costs which vary

& depending on the type of product stocked.
y It includes:
y Cost of money / opportunity cost (3-24%) y Obsolescence (2-20%) y Spoilage / Damage (1-5%) y Warehousing (1-3%) y Insurance / Administration / Maintenance (1-5%)

Ordering Cost
y Order processing y Supplies / Forms y Clerical support y Receiving / Inspection y For manufacturing
y Clean-up cost y Re-tooling cost y Adjustment cost

Shortage Cost
y Reputation of the company; y Loss of orders / profits y Increase in the costs:
y y y y

Overtime/ sub-contracting Additional delivery Idle machinery and human resources Etc«


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