Intro to Inventory (Cost and Importance)

Now that we have discussed the different types of stock we can now talk about some of the costs that are associated with having inventory.  Generally speaking, costs can be divided into two main groups.  Ordering costs and holding costs.  Ordering costs can simply be described as the cost of the personnel that actually place the orders and the costs associated with expediting or shipping the product.  Holding costs, on the other hand, are a little deeper.  There are storage costs such as building rent, material handling equipment, labor to receive and manage the inventory, stock losses like theft and damage just to name a few.

Tyler, TX September 2,2008– A member of the Texas Forest Service moves a batch of MRE (meals ready to eat) in a warehouse in Tyler, TX.supplies in a The warehouse is being used to handle basic supplies of water and MRE (meals ready to eat) for distribution to residents affected by Hurricane Gustav. Photo by Patsy Lynch/FEMA

Maintaining inventory is important for several reasons; in order to plan, schedule and be prepared for the dynamic world of the supply chain, inventory can act as a bridge between what you need and what you produce.  Inventory enables you to establish a level of predictability within your business.

There are times when demand fluctuates or spikes and having adequate amounts of stock on hand to meet those fluctuations or peaks provides a level of protection or insurance if you will.  When a customer relies on the fact that your organization will have a certain product on hand, it is your inventory that solidifies your value as a provider, vendor, or business partner in the eyes of the customer.  There is no worse feeling than when a customer requires an item urgently, and they look to you to get them out of the jam only to find out that you cannot deliver the product due to insufficient stock.  A balancing act must be maintained as to not overstock and tie up too much money on material that does not turn quickly.

On the other side of the coin supply can also fluctuate.  Raw materials may become scarce for a variety of reasons and the availability of what you need may become increasing difficult to obtain.  Inventory protects your organization from circumstances that are out of your control or line of sight.

Inventory is a key function of price protection.  As we all know prices are on the move and they usually move upwards.  When holding stock on the floor you insulate yourself from the cyclical price increase that we all experience.  Many times you can receive a discount if you buy in bulk.   Also, if you are ordering less often than the costs associated with ordering, like freight, are minimized.  A wise purchasing department utilizes blanket purchase orders to lock in the price over a period of time but not carry the stock in house limiting their exposure to over spends on inventory.

Inventory is important for certain organizations to protect pricing, customer satisfaction, to control fluctuations in supply and demand, and limit overall exposure to the changes of the business climate.  To learn more, contact a Zenventory Zensei for a demo or to start your free 30 day trial.