Handling the inventory. Once the inventory is in place, there are costs that come with its movement such as handling equipment, employee costs, and freight and transportation. Consider the forklifts, pallet trucks, and vehicles that must be used to move inventory from A to B.
Additional costs for inventory include back-end expenses involved with accounting staff to measure and manage the inventory and the time spent by managers to fix inventory issues. With all these additional costs included, the total cost of holding inventory can reach 30% of the inventory’s book value. Going back to the example of $15 million in inventory, a company can see true holding costs of $4.5 million a year – much higher cost than originally thought. After establishing costs, it’s vital to determining the right amount of inventory to carry.
Right-sizing inventory. Finding the right inventory level involves balancing several factors. Too much inventory raises the holding costs, but too little means possible shortage and not meeting customer demand. Here are four elements that together should be judged to determine the right levels of inventory.