The Six Sigma Team
The Composition and the Reporting Structure Any Six Sigma Team usually has 7 types of personnel and a three layer reporting structure. The details of the same are as follows: Layer 1 of the Six Sigma Team: Project Champion and Process Owner Layer 2 of Six the Sigma Team: Project Lead, Finance Certifier, Project Coach […]
Aligning all Processes – Importance and Challenges
Now, since we know about the different types of processes that an organization has, it is essential that we understand that these are just the pieces of the puzzle. How these pieces fit together is what creates a masterpiece or an average organization. However, understanding the components has given us a clear idea of what […]
Some Insights into the Infosys and TATA Sagas that are Relevant to all Organizations
Many of you would have read about the dramatic events of the last two days pertaining to the Indian IT (Information Technology) bellwether and behemoth, Infosys, which was played out in the public domain and which culminated in the resignation of its first non-founder chairperson, Vishal Sikka, amidst allegations of malfeasance of corporate governance and […]
The PDSA (Plan-Do-Study-Act) Technique for Quality Improvement
What is the PDSA Technique ? The PDSA or the Plan-Do-Study-Act technique is a famous QI or Quality Improvement Tool or Initiative that helps organizations enhance the quality of their products and services. The PDSA technique hinges on the iterative process wherein each cycle begins with planning the quality improvement, actualizing the method or the […]
Overcoming the Challenges of Delivering Projects on Time and Without Cost Overruns
Why Do 80% of All Projects Fail to Deliver on Time and What can be done About Them Research shows that nearly 80% of the projects fail to maintain timely completion of deliverables at each stage of the project as well as fail to finish on time. Project Managers often complain that the Triple Constraint […]
Inventory procurement, storage and management is associated with huge costs associated with each these functions.
Inventory costs are basically categorized into three headings:
Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering Cost is dependant and varies based on two factors - The cost of ordering excess and the Cost of ordering too less.
Both these factors move in opposite directions to each other. Ordering excess quantity will result in carrying cost of inventory. Where as ordering less will result in increase of replenishment cost and ordering costs.
These two above costs together are called Total Stocking Cost. If you plot the order quantity vs the TSC, you will see the graph declining gradually until a certain point after which with every increase in quantity the TSC will proportionately show an increase.
This functional analysis and cost implications form the basis of determining the Inventory Procurement decision by answering the two basic fundamental questions - How Much to Order and When to Order.
How much to order is determined by arriving at the Economic Order Quantity or EOQ.
Inventory storage and maintenance involves various types of costs namely:
Inventory carrying involves Inventory storage and management either using in house facilities or external warehouses owned and managed by third party vendors. In both cases, inventory management and process involves extensive use of Building, Material Handling Equipments, IT Software applications and Hardware Equipments coupled managed by Operations and Management Staff resources.
Inventory storage costs typically include Cost of Building Rental and facility maintenance and related costs. Cost of Material Handling Equipments, IT Hardware and applications, including cost of purchase, depreciation or rental or lease as the case may be. Further costs include operational costs, consumables, communication costs and utilities, besides the cost of human resources employed in operations as well as management.
Includes the costs of investments, interest on working capital, taxes on inventory paid, insurance costs and other costs associate with legal liabilities.
The inventory storage costs as well as cost of capital is dependant upon and varies with the decision of the management to manage inventory in house or through outsourced vendors and third party service providers.
Current times, the trend is increasingly in favor of outsourcing the inventory management to third party service provides. For one thing the organizations find that managing inventory operations requires certain core competencies, which may not be inline with their business competencies. They would rather outsource to a supplier who has the required competency than build them in house.
Secondly in case of large-scale warehouse operations, the scale of investments may be too huge in terms of cost of building and material handling equipments etc. Besides the project may span over a longer period of several years, thus blocking capital of the company, which can be utilized into more important areas such as R & D, Expansion etc. than by staying invested into the project.
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