How can you use inventory carrying cost to improve distribution logistics?

Inventory carrying cost, often referred to as holding cost, is the expense associated with holding inventory in storage over a certain period. It encompasses various costs incurred by a business to maintain its inventory levels. Storage cost, Capital cost, Handling and transportation cost, Insurance and security cost, Obsolescence and Deterioration Costs, Opportunity Costs etc. are the components of Inventory carrying cost.

Inventory Carrying Cost=Average Inventory × Inventory Carrying Rate Average Inventory is the average value of inventory held over a specific period. It can be calculated by adding the beginning inventory value to the ending inventory value and dividing by 2. Average Inventory = (beginning inventory value + ending inventory value) / 2 Inventory Carrying Rate is the percentage of the inventory value that represents the carrying cost. This rate typically includes factors such as storage costs, capital costs, handling costs, obsolescence costs, and other relevant expenses. The inventory carrying rate can be expressed as an annual percentage. Inventory Carrying Rate = (Total Inventory holding cost/Average Inventory Value) X 100%

ork closely with suppliers to establish reliable lead times and minimize supply chain variability. Implement vendor-managed inventory (VMI) or collaborative planning, forecasting, and replenishment (CPFR) programs to synchronize inventory levels with supplier capabilities. Calculate the optimal order quantity that minimizes total inventory costs, including ordering costs and holding costs. Consider factors such as carrying costs, ordering costs, and replenishment frequency to determine the EOQ for each SKU. Set reorder points based on lead times, demand variability, and desired service levels to ensure timely replenishment of stock. Incorporate safety stock to buffer against demand fluctuations and supply disruptions.

Streamlining of material handling processes by investing in equipment automation, such as conveyor systems, forklifts, and automated guided vehicles (AGVs), to improve efficiency and reduce labor costs associated with manual handling would be required. Maximization of storage capacity by reorganizing warehouse layout, utilizing vertical space with racks and shelving, and implementing slotting optimization techniques to ensure efficient picking paths can be done. Implementation of labor management systems (LMS) to track and optimize workforce productivity, allocate resources effectively, and identify areas for improvement in picking, packing, and shipping processes is suggested.

While the approaches mentioned in this article can help to improve costs in the short term, I think the more important - albeit more challenging - opportunities are in network design. Take a broader perspective: Transportation, inventory, service levels, risk... Using scenarios, will enable you to better understand your options and to make strategic choices on any trade-offs. Once you are clear about your setup, continue to optimize its elements. On a side note: Don't forget about the capital cost of inventory in transit.