The Four Main Elements Of Inventory Cost

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Inventory Cost
Are the one of the major logistics costs for large number of manufacture and retail companies, and they can represent a significant element of the total cost of logistics. There major cost trade –offs that can made with all the other key logistics components. It is important to be able to understand what the key cost relationships are within a company.
There are four principal elements of inventory holding costs are:
1. Capital Cost :The cost of the physical stock it also a financial charge that is the current cost of capital to a company or the opportunity costs of tying up a capital that might otherwise be producing a better return if invested elsewhere.
2. Service Cost: The cost of stock management and insurance.
3. Storage
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Periodic Inventory Control System- this system the number of items in store is reviewed at a fixed time interval.
3. Perpetual Inventory System –Is a system is based on the economic order quantity and re order point.
4. Two bin Inventory Control System- the distinguish feature of this system is the absence of the perpetual record which reduce the amount of administration required, thus reducing the cost of control.
Lead time
One of the major reason for the building –up of finished goods inventory is because of the long time that they takes to manufacture and deliver product. The customer would be prepared to wait the full amount of time that is required. The course happened only rarely for special made to order products. The vast majority of products are required immediately, as for industrial products at the point of sale for consumer product when retailer orders them for the first instances from the manufacturer. The total time it takes to complete the manufacture and supply of product is often known as the logistics lead time. Customers are prepared to wait for a limited period of time before the order is delivered. This is customer order cycle time. The different between the logistics lead time and the customer order cycle time is often known as the lead – time gap. The concept of the lead time gap is in the next
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These include the cost of storage facility and the cost obsolesces when product become outdated and have to be sold at discount rates or even scrapped. Finding a solution to these inventory related problem can lead to significant reduction in the requirement to hold stock. These approaches recognize the importance of time within the inventory decision –making process. The aim of lead time reduction is to reduce the amount of unnecessary time within the order to delivery process and thus reduce the need to hold so many inventories as cover for this time delay. This can be achieved in a number different ways

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