Everything You Need to Know About Inventory Carrying Cost
Inventory has always been one of the trickier parts of running your own business. Businesses need to strike a balance between having too much inventory, which can tie up cash and lead to higher carrying costs, and too little inventory, which can result in lost sales. In order to do this, businesses need to be able to manage their inventory carrying costs. Considering how important it is, it's in your best interest to know as much as you can about it. To help you out, here's a brief article breaking down everything you need to know about inventory carrying costs.
What Are Inventory Carrying Costs?
Inventory carrying costs are the costs associated with storing and maintaining inventory. They can include costs such as storage space, insurance, inventory shrinkage, and obsolescence. Keep in mind that the level of inventory carrying costs will vary depending on the type of business and the products being stored. For example, a company that manufactures and sells computers will have different inventory carrying costs than a company that sells perishable goods.
Inventory carrying costs are an important consideration for businesses when making decisions about inventory levels. Too much inventory can tie up cash and lead to higher carrying costs, while too little inventory can result in lost sales and customer dissatisfaction. The goal is to find the right balance of inventory to minimize carrying costs while still meeting customer demand.
What Are the Different Types of Inventory?
Inventory can be classified into several different types, each of which has its own advantages and disadvantages. The most common types of inventory are:
Raw Materials: These are the basic materials that are used to manufacture a product. They can be either purchased from suppliers or extracted from the environment.
Work-in-Progress (WIP) Inventory: This is inventory that is being processed and has not yet been completed. WIP inventory can include items such as unfinished products, semi-finished products, and components.
Finished Goods: These are products that have been completed and are ready to be sold.
Maintenance, Repair, and Operations (MRO) Inventory: This is inventory that is used to maintain, repair, and operate equipment. MRO inventory can include items such as tools, parts, and supplies.
Retail Inventory: This is inventory that is held by retailers for sale to customers. Retail inventory can include items such as finished goods, semi-finished goods, and raw materials.
Service Inventory: This is inventory that is used to provide services. Service inventory can include items such as equipment, parts, and supplies.
How Do You Calculate Inventory Carrying Costs?
To calculate inventory carrying costs, you first need to determine your inventory turnover rate. This is the number of times your inventory is sold or used in a given period. Once you have your inventory turnover rate, you can calculate your carrying costs as a percentage of your sales. For example, if your inventory turnover rate is four and your sales are $100,000, your inventory carrying costs would be $4,000.
Conclusion
We hope this article proves to be useful when it comes to helping you gain a better understanding of inventory carrying costs. While this may seem like a lot, the information that we’ve outlined above should make managing inventory carrying costs easier. Feel free to refer back to this article if you need a quick refresher on this subject.
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