Wednesday, August 20, 2008

Inventory carrying cost

Company's inventory carrying cost percentage – that is, what it costs to maintain a dollar's worth of stocked inventory in your warehouse for an entire year. The carrying cost is used in many inventory analysis and planning formulas including the economic order quantity formula, the calculation that is designed to determine your "best buy" replenishment quantity.
* It is fairly easy to calculate a distributor's or manufacturer's inventory carrying cost.
* There is no single accurate default value for the inventory carrying cost.
Replenishing inventory with quantities other than this "best buy" quantity will cause your company to experience higher costs and/or excess inventory.
There is no way to determine which order quantity represents the "best buy" without accurately calculating your company's specific carrying cost percentage and cost of ordering stock. The cost of ordering stock is the cost of issuing and processing a line item on replenishment order. I have read many articles stating that, as with the inventory carrying cost, this number is also too hard to calculate. Many analysts suggest that you should just pick a value between $5.00 and $6.00. As with using rules of thumb for the inventory carrying cost, if you just guess at your company's cost of ordering stock, the resulting economic order quantity will not represent your company's best buy quantity.

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