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I have heard from a few of you on this topic over the years. There are so many components that can be included in the calculation for carrying-costs. Ultimately, it is YOUR benchmark for determining improvements or slippage in inventory management. So don't labor over what to include, but be consistent with the formula. However, I would suggest that "more is better". The various costs that are included will yield more opportunities to identify improvements.
Most experts agree on the average a company’s inventory carrying cost is around 25% of its average annual inventory investment. Knowing how and consistently measuring this cost will quickly spotlight problems that are be occurring in your warehouse, inventory stocking levels, and overall management decisions. Costs that should be included in the calculation are:
* inventory risk costs like obsolescence, damages, pilferage, and undocumented usage – the largest component
* storage space
* material handling equipment
* inventory service costs like insurance
Without this measurement, you can’t properly optimize your inventory management system, which means you can’t make informed decisions about establishing the right inventory levels.
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