However, they might be surprised to know how efficient warehouse inventory management can significantly reduce inventory holding costs.Ī warehouse redesign can reduce the chance of existing inventory going unnoticed, thereby reducing obsolescence, depreciation, tax, and insurance costs.
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Now, let’s see how to calculate it.Īs mentioned in the previous part, most retailers are often not making the most of their space. With a clear understanding of carrying cost definition and components, you can decide when to make the necessary adjustments to your inventory control procedures. While you can easily quantify costs like rent storage space, you also need to consider intangible costs that are difficult to measure, like this opportunity cost. In addition to the above 4 types of costs, there are opportunity costs, which are investments and improvements that you fail to make because your assets are tied up in inventory. If you utilize third-party logistics providers (3PL), the cost of outsourcing warehousing and shipping logistics can fluctuate depending on volume and usage. If you own your warehouse, these costs are fixed and predictable. Inventory storage space costs: Cost to purchase or rent warehouse space, move items in and out of the warehouse, and pay for physical security, climate control, and utility management.In addition, if you store items for too long in the inventory, their value may drop compared to their original value. Inventory risk costs: The risks of unsold inventory due to obsolescence, expiration or damage, or product shrinkage due to theft or incorrect record keeping.Inventory service costs: Cost to keep goods in the warehouse, including fees for inventory management software, hardware investments, insurance, and taxes.This cost type accounts for the highest proportion, about 25%, of total inventory value.
Capital costs: Cost of purchasing inventory or raw material items and associated finance charges such as interest and loan maintenance fees.Inventory carrying cost consists of 4 categories:
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