Wednesday, 7 January 2015

What are Inventory Costs?

There are four costs that are involved in each decision regarding the size of the inventory.
  • Holding costs – Holding costs, also known as carrying costs, includes lots of different costs such as the storage facilities, insurance, depreciation, breakages, taxes, handling and so on. Lower inventory levels and frequent replenishment help to reduce the holding costs.
  • Set-up – Set-up costs, also known as production change costs, are found in the production of each different product. Every single production involves acquiring the right materials, arrangements, paperwork, and movement of stock and so on. When there are no costs or losses in time between making different products small lots can be minimized to reduce the inventory levels and to make savings.
  • Ordering – Each placed order has different costs in the managerial and clerical departments. The ordering costs include counting, calculating and all the other details involved in production orders and maintaining the tracking systems.
  • Shortages – If there are shortages orders have to be made to replenish the inventory and there are costs involved. A balance needs to be found to avoid the costs of stock outs, which will affect the customers, cause a loss in profits and incur late penalties.

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