Question

Define components of inventory carrying costs? Identify some of these components and their associated costs.

Identify different types of inventory. Give examples of each.

What is the purpose of carrying inventory? Is inventory a good thing or a bad thing?

Answer 1

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1.Define components of inventory carrying costs? Identify some of these components and their associated costs.

When businesses seek to reduce costs, they frequently neglect the stock in their warehouses and the expense to transport it. In order to maximize the supply chain of a company, it is crucial that companies look at all the expense of carrying an inventory carefully and decide where they can make adjustments to minimize the cost and benefit the company in the final analysis. The cost of holding inventory is an essential part of the total cost.

Main components of carrying cost of inventory are:

• Capital Cost Capital cost is the cost of maintaining an inventory of a product. It is the principal part of the overall production costs. For example, when a company states that the capital costs of a business are 35% of the total inventory expenses of the company and the total holding stock amount to $6,000, the costs for the capital are $2,100. It can be a figure based on a statistic or a figure based on an experience in the industry, because businesses must include a percentage of the capital cost.
• Storage Space Cost The cost of storage space is a mix of warehouse rent or mortgage, electricity, heating, air conditioning, and handling costs of moving the goods in and out of the warehouse. Some of the costs are fixed, such as rent or mortgage, but there are variable costs, such as managing supplies that differ with inventory level.
• Inventory Service Cost The cost of transporting inventory will include distribution service costs. Other expenses include premiums payable to local government on the inventory, and taxes. The premium a business charges depends on the type of product in the warehouse as well as the inventory volume. The higher the warehouse size, the higher the insurance premium. Most local authorities are levying levy
• Inventory Risk Cost Inventory carriage is subject to some degree of risk. This risk is a component of the cost of carrying stock. When a company holds items in the warehouse it is always possible that products will fall into real value during their stock.

If a company kept the parts for its work centers or machinery, but they were replaced by a new product, the parts could be much less than the price in the factory, for example, than that charged in the beginning. The probability of finished goods being seasonally different in the retail sector is significantly higher.

Other aspects of stock risk include the possibility of expiry of stored goods, especially products with a sale-by date or usage-by date. If the products expire, they can be useless and scrapped. Things can also deteriorate in the warehouse, caused by exposure to water, heat damage or inadequate stocking.

2.Identify different types of inventory.

• Raw Materials For obvious reasons such as goods production, raw materials are important. Raw materials are what the manufacturers and retailers are selling. You can not precisely quantify the goods you manufacture over the next quarter or year if you don't have a system that gives access to raw materials. A business will fail if its raw material inventory is not properly managed. For example, for four days a multi-million dollar company had to shut down and stop its production because they ran out of pallets for storage and shipment. For shipping and manufacturing companies, pallets are very important, and if they are overlooked, the business will suffer.
• Work in Progress  The other form of inventory consists of the items that are currently produced in your business or a contractor. Since many businesses ignored this aspect, ERP systems were introduced to track all products, including raw materials into production, to track profits accurately and help plan future purchasing of raw materials.
• Finished Goods  Usually, your distributors or your warehouse manage this sort of inventory. It is crucial for businesses with many distributors to know how many of their products are on the market. In the case of automakers in particular. When the finished goods are not clear, it is difficult to produce for several distributors.
• Service Inventory Compared with the problems of the retail industry, the distribution inventory barely keeps a candle, on the most difficult of the five inventory types. Significant to the business, the inventory of services needs good management. Global policies need to be managed, such as recycling and energy regulations. Using a failure analysis to develop better products and maximize parts sales, you can collect details about failed products.

3.What is the purpose of carrying inventory? Is inventory a good thing or a bad thing?

The aim of the inventory is to track the movements of stocks as the basis for the location of regular stocks, and for the purposes of procurement.Good inventory management supports your cash flow, as well as your production systems. Besides the importance of keeping inventory as lean as possible so that you will have more cash available, inventory management should also be integrated with finance and accounts payable for strategic decision making.

The control of inventories is equally dictated by the importance of the item's needs of the production department and the availability of alternative sources for this inventory. You can buy inventory time if you know the schedules for order and distribution and understand the nature of the way each material was used, but you have no unnecessary supply at your disposal. In addition to long lead times product transactions, you can which things closer for products you can procure quickly or through multiple outlets.