1) Inventory represents a temporary monetary investment in good on which a firm must pay interest
2) Total time for items to pass through the process, throughput time
3) Inventory holding costs: the variable cost of keeping items on hand, including interest, storage, and handling, taxes, insurance, and shrinkage
Why would you have low inventory?
Cost of Capital
- instead of spending tons of money and having tons of inventory, you watch what inventory you have and save money
Weighted Average Cost of Capital (WACC)
Storage and Handling Costs
- costs related to storage of products, moving products in and out of storage, which will become a short term or long term expenses
- use the storage space in a productive way, increase opportunity costs
Taxes, Insurance and Shrinkage
- more taxes are to be paid if at end of year, there is high inventory
- insurance will increase when there is more to insure
Why would you have high inventory compared to low inventory?
Customer Service
- using customer service representatives to help with backorders or stockouts. Sometimes when customers have to wait for inventory to come in, they will decide to take their business elsewhere. Customer service representatives can be the liasons with customers, where they can provide discounts for stockouts or backorders
Ordering Costs
- will keep ordering costs low. Instead of paying an ordering costs everytime you place an inventory order, you can place one big order and only have one ordering costs, which will make your variable costs lower
Setup Costs
- costs involved in changing over an operation to product a different component, item or service
Labour and Equipment Utilization
- having an increased amount of inventory, management has the ability to increase workforce productivity and facility utilization in three ways
1) place larger, less frequent orders
2) holding inventory
3) building inventory
Transportation Costs
- the costs related to transporting inventory from one location to another
- making realistic choices (i.e. not sending a big truck for one box)
- reducing costs
Payments of Suppliers
- if suppliers can tolerate a higher inventory level, they may offer a quantity discount
- a quantity discount will reduce costs for a firm
2) Total time for items to pass through the process, throughput time
3) Inventory holding costs: the variable cost of keeping items on hand, including interest, storage, and handling, taxes, insurance, and shrinkage
Why would you have low inventory?
Cost of Capital
- instead of spending tons of money and having tons of inventory, you watch what inventory you have and save money
Weighted Average Cost of Capital (WACC)
Storage and Handling Costs
- costs related to storage of products, moving products in and out of storage, which will become a short term or long term expenses
- use the storage space in a productive way, increase opportunity costs
Taxes, Insurance and Shrinkage
- more taxes are to be paid if at end of year, there is high inventory
- insurance will increase when there is more to insure
Why would you have high inventory compared to low inventory? Customer Service
- using customer service representatives to help with backorders or stockouts. Sometimes when customers have to wait for inventory to come in, they will decide to take their business elsewhere. Customer service representatives can be the liasons with customers, where they can provide discounts for stockouts or backorders
Ordering Costs
- will keep ordering costs low. Instead of paying an ordering costs everytime you place an inventory order, you can place one big order and only have one ordering costs, which will make your variable costs lower
Setup Costs
- costs involved in changing over an operation to product a different component, item or service
Labour and Equipment Utilization
- having an increased amount of inventory, management has the ability to increase workforce productivity and facility utilization in three ways
1) place larger, less frequent orders
2) holding inventory
3) building inventory
Transportation Costs
- the costs related to transporting inventory from one location to another
- making realistic choices (i.e. not sending a big truck for one box)
- reducing costs
Payments of Suppliers
- if suppliers can tolerate a higher inventory level, they may offer a quantity discount
- a quantity discount will reduce costs for a firm
