You can calculate it using the inventory holding cost formula: With too much capital tied up in stock that you could use elsewhere, your carrying or holding costs will soar, where:Ĭarrying cost refers to all the costs of storing and maintaining inventory, including warehousing, wages, transportation, insurance, security, depreciation, rent, utilities, and taxes. A word of caution on holding inventoryĪs important as holding inventory may be, carrying too much can be detrimental. Regardless, by having safety stock on hand, you protect against these scenarios-avoiding delays in shipping and production-and can continue to meet customer demand. Perhaps the lead time on a particular component is longer than usual due to labor strikes in a factory. Maybe a manufacturer had to shut down their operation for a few days due to health and safety concerns. Unforeseen disruptions in the supply chain can lead to order delays, unhappy customers, and lost profits. You avoid having to place last-minute orders, which usually cost more, and you can take advantage of quantity discounts and reduced shipping costs by ordering in bulk. This is a distinct possibility during busier periods, and it’s why, for example, retailers hold extra inventory during the festive season. Stockouts occur when you run out of a particular product, which can be costly, leading to lost sales and customers. Faster order fulfillment keeps customers satisfied and loyal. You can fulfill orders immediately without having to order from suppliers and wait for delivery. Meeting customer demand promptly means you’re better poised to reach your revenue and profit targets. Holding inventory offers a host of other benefits-from helping you reach your profit targets and avoiding costly stockouts to reducing costs and protecting against unforeseen supply chain disruptions that can really throw a wrench into your operations. Five additional reasons for holding inventory This ability to meet customer demand without delays is but one reason for holding inventory. To ensure you can meet customer demand quickly and efficiently-and to keep customers happy-you keep raw materials and the finished products on hand. You source raw materials from suppliers with three to four weeks lead time, and your entire production process takes another two. You’re a manufacturer who produces high-end furniture for your clients. Learn the reasons for holding inventory and its effects.
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