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Loose or Tight Monetary Policies ? The debate over whether central banks around the world must pursue loose monetary policies or tight monetary policies has become sharp in the aftermath of the global financial crisis. Loose monetary policy refers to the practice of central banks keeping interest rates low, stimulating the economy as banks would […]
Will London Still be the Financial Capital of the World ?
Experts believe that the effects of Brexit will be varied in nature. What has happened now is a mere announcement of the intention of Britain to leave the European Union. However, the effects are not really seen. There are contradictory views about the possible outcomes. Some believe that the outcome will be catastrophic for Great […]
Sourcing Strategies and Procurement Processes
Not long ago, purchase function was seen to be a desk job, monotonous paper work, dull and passive and more of an administrative function. The purchase managements were the fall guys whose only aim was to keep feeding shop floor and avoiding stock out situation. Today the situation has changed totally. Procurement function is considered […]
The Two Conflicting Theories of Recession
The “R” word is back in town. Economists and analysts all over the world are now wary about the fact that a major recession may be just around the corner. They have different facts that make them believe that a recession may be about to happen. However, their conclusions are pretty much the same. For […]
The Future of Work
Abstract The world of work is changing as we speak and the winners and losers in the workplace of the present are those who can adapt and thrive in this paradigm without being lost in the maze of complexity and chaotic work arraignments. Unlike the baby boomers and those before them, the Millennial generation cannot […]
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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