Sunday, August 17, 2008

Understanding inventory cost

The real key to understanding inventory cost and service is to understand what causes imbalances in supply and demand in the first place.
Transportation related inventories are called pipeline stocks. Of course, transportation is not the only cause of delay between points in a supply chain. Lead times for production, communication and order fulfillment can also introduce significant delays. Anytime such delays are present, they may create inventories. If the delay is due to production, the inventory is typically called a work-in-process (WIP) inventory.
Inventory belongs to the shipper or the receiver. In some cases, ownership changes hands when the shipment
is initiated. From an accounting standpoint, the inventory then belongs to the receiver and becomes an entry in the accounts receivable ledger of the shipper. In other cases, ownership does not change hands until
the goods are delivered, in which case the inventory stays on the books of the shipper whilst in-transit.
The resulting cost differences can be significant when shipping delays are long.

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