Inventory Costs

How to approach total inventory costs?

Inventory management and inventory strategy are key elements in operational practice. Inventory is a significant asset on the balance sheet of manufacturing companies. Inventory can represent up to 30% of the total assets and packaging supplies often represent a sizeable portion of this value. Furthermore, the effectiveness of handling inventory is closely tied to overall success. There is a significant connection between financial performance and inventory performance.

Defining an optimal inventory strategy is complex. All direct and indirect costs related to holding inventory are underestimated. The common idea is that holding your own inventory is the only option and it is considered as a matter of course in the structure of your business.

The costs are (mostly) invisible or beyond awareness. In our view the attitude should be a more critical one.

 

How to approach total inventory costs?

Inventory management and inventory strategy are key elements in operational practice. Inventory is a significant asset on the balance sheet of manufacturing companies. Inventory can represent up to 30% of the total assets and packaging supplies often represent a sizeable portion of this value. Furthermore, the effectiveness of handling inventory is closely tied to overall success. There is a significant connection between financial performance and inventory performance.

Defining an optimal inventory strategy is complex. All direct and indirect costs related to holding inventory are underestimated. The common idea is that holding your own inventory is the only option and it is considered as a matter of course in the structure of your business.

The costs are (mostly) invisible or beyond awareness. In our view the attitude should be a more critical one.

Direct investment expenses

  • The cost of capital invested in the inventory (as mentioned above)
  • Insurance on the inventory
  • Yearly loss due to obsolescence and damage

Costs of housing the inventory

  • Depreciation or rent on the building holding the inventory (or the part of the building used for inventory)
  • Heat and utilities in the building holding the inventory
  • Building maintenance
  • Property insurance
  • Cost of capital invested in the property

Costs of housing the inventory

  •  Depreciation or rent on the building holding the inventory (or the part of the building used for inventory)
  • Heat and utilities in the building holding the inventory
  • Building maintenance
  • Property insurance
  • Cost of capital invested in the property

Administration and accounting costs

  •  Staff costs
  •  Management time spent on solving inventory issues

Costs of system failure

  •   Lost business, profits or impaired goodwill from (too) late delivery of materials due to disruption in the supply chain.

When these additional costs are taken into account, the actual cost of holding inventory can represent 25-30% of the inventory’s book value. For the company with €100,000 in packaging inventory this translates into total stocking costs of € 25,000 per year – about 4 times higher than the cost-of-capital calculation. The expense can climb even higher if improper inventory management is involved.

In our experience the Actual Cost of Ownership (ACO) approach avoids these costs, results in significant savings and is often the first step to optimize your packaging management.