How to get an accurate measure of inventory carrying costs

He has also attained certifications as a Six Sigma Black-Belt, in Lean Manufacturing, and as a trained medical first responder.

How to get an accurate measure of inventory carrying costs

Excerpts from the Book: Anderson There are many opportunities to reduce total cost in supply chains, which are responsible for many unnecessary overhead costs to generate forecasts, count inventory on-hand, generate purchase order inputs through MRP Material Requirement Planning systems, place purchase orders, wait for parts to arrive, expedite those that are late, receive and maybe inspect materials, warehouse, group into kits for scheduled production, and distribute within the plant.

These costly and time-consuming steps can be avoided with a spontaneous supply chain, which is able to pull in materials and parts on-demand.

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Spontaneous Resupply The concepts presented herein are labeled as the resupply of parts and materials as opposed to procurement or purchasing. This is to emphasize that most of supply chain management is a resupply function of parts and materials that have been procured before.

Most of the spontaneous part and material resupply will be automatic or manually triggered by production personnel, not by MRP and purchasing.

How to get an accurate measure of inventory carrying costs

There are two aspects of the spontaneous supply chain: The Role of Standardization Identify the most common and least common parts by sorting usage in Pareto format.

Standardize on the most common materials, even if they are a higher grade or tolerance; the total cost savings in material overhead and purchasing leverage should compensate for any perceived cost increase.

New products should be designed around these standard materials. Existing designs could be converted for any "better than" substitutions.

Definition of the inventory costs - Inventory Optimization Software - Lokad

Unusual and seldom-used materials should be discouraged in product development and phased out after conversion on existing products. For very flexible environments like lean, build-to-order, and mass customization, the standardization should be very aggressive.

The effective procedures presented in the Standardization article should be used to aggressively standardize raw materials. Standardization reduces the incoming variety which helps enable the spontaneous supply chain. Purchasing leverage and other material overhead savings compensate for any cut-off waste and for some products getting "better" material than they need.

Standardization can also protect a manufacturer from shortages, which are more likely to occur if production depends on many unusual materials.

Raw materials could be automatically resupplied using the following techniques in order if increasing variety: Steady Flow of Standard Raw Materials. The ultimate scenario for spontaneous resupply is to reduce the number of raw material types within each category to one, in which case steady flows can be arranged for each standard raw material.

Ideally, there should only be only one type of each material. Then forecasting multiple types would be unnecessary and "ordering" would be as simple as matching the tonnage in to the tonnage out; in other words, the incoming flow of the standard raw materials would be equal to the monthly consumption of the plant.

These will be used one way or another. Multiple types of materials in each category would allow the same spontaneity if the ratio is constant or predictable and usage is segregated if not, material changeover would have to be quick and hopefully automatic.


Raw materials can be cut to-length or to-shape on-demand from the longest version or standard sizes by programmable CNC Computer Numerically Controlled equipment, such as laser cutters and screw machines. If the sheet metal can be standardized to predominantly one type for the factory, then sheet can be ordered on a coil, at much less material expense, and fed from a coil dispenser and straightener.

Note that after the first cut, the sheet can be rotated for second cut made in the open space shown in the foreground of the same shear, either automatically or manually positioned against a programmable stop, with appropriate safety assurance with sheet grippers and two-handed switches.

Benefits of Sheet Metal Source Cell: The result is on-demand shearing of low-cost sheet that is always available. Raw material variety can be greatly reduced by cutting off linear materials on-demand at the points of use or as kanban parts resupplied automatically to all the points of use.Inventories and Cost of Goods Sold Cost of inventory includes all costs incurred in bringing the inventory to its existing condition and n Replacement cost is used as measure of market value (thus we should really call it the lower of cost or replacement rule).

And because there is less inventory, let's say that carrying costs (warehouse storage charges, insurance, finance charges, etc) is reduced by 2% of the general administrative expense. It is important to have inventory records, which are accurate. Most experts agree that this accuracy must be at least 95% and even higher for critical or high.

To come up with a balance sheet estimate of inventory, companies must use different rules and methodology to account for the goods. Most common methods include the FIFO inventory method, which is the "first in, first out" method and the LIFO inventory method, which is .

Logistics, Inventory Control, and Supply Chain Management by Frank Dooley M forecasts are quite accurate. However, inventory levels may still be large ance the cost of carrying inventory against the costs associated with ordering or shortfalls (Figure 3). Many small business owners fail to appreciate fully the true costs of carrying inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of money tied up in inventory.

A firm must track three types of costs to determine the correct level of inventory to keep in stock: purchasing costs, inventory carrying costs, and the costs incurred by A. stockouts.

How to get an accurate measure of inventory carrying costs

B. overruns.

Inventory Management Time to revisit the principles - Logistics Management