The three types of inventories are direct material inventory, work in progress inventory and the finished goods inventory where the direct material inventory includes the stock of raw material which the company has purchased for its use in production. Total annual inventory costs for last three years are calculated considering different periods i. Inventory management is the basis of a wellfunctioning retail business. Historical cost it refers to the actual cost of acquiring an asset or producing a product or service. Inventory costs ordering cost, carrying cost and stock. Normal cost it is a cost which normally incurred in achieving a certain level of output under certain conditions. Discuss types of inventory cost within the materials management forums, part of the publish upload project or download reference project category. Pdf inventory management is a challenging problem area in supply chain management.
Cost of loss, pilferage, shrinkage and obsolescence etc. Lifo and fifo are methods to determine the cost of inventory. This also means that such items of inventory enjoy high demand. Inventory costs holding cost costs that vary with the amount of inventory held typically described as a % of inventory value also called carrying cost ordering cost costs involved in placing an order sometimes called setup cost inversely related to holding cost shortage cost occur when we run out of stock 98. Minimizing inventory costs chandlergilbert community. To that end, management must determine when various items. A comparison of current years inventory ratio with those of previous years will unfold the following points relating to inventories. This cost represents the costs of capital tied up, warehouse space, insurance, taxes, and so on. Understanding and managing inventorydriven costs can have a significant impact on margins. Methodology of calculating inventory carrying costs pdf. Inventory costs are basically categorized into three headings ordering costs, carrying costs and shortage or stock out cost and cost of replenishment.
Inventory must be viewed as a positive contributor to corporate profitability. The shortage costis the cost of not having a bicycle on hand when needed. A retail appliance store sells 2500 tv sets per year. Inventory affects costs in more ways than you may realize. Inventory procurement, storage and management is associated with huge costs associated with each these functions. Pdf comparison of inventory models for minimizing total. In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of. Inventory costs are basically categorized into three headings. Pdf a study of inventory management system case study. In this article, i want to just show the savings that can occur from a focus just on the inbound side, and give supply chain practitioners a little. Insurance cost is not proportional to the level of inventory since it is incurred to cover a certain value of product for a specified time. A sensitivity analysis is conducted to investigate the impact of parameters on the optimal inventory policy. Download a pdf version for easier offline reading and sharing with coworkers. Inventory costs ordering cost, carrying cost and stock out cost.