COST STOCK INVENTORY

If you don’t know your Inventory Carrying Cost, the following will assist you in calculating it. An explanation for each item is below the chart.

Inventory Carrying Costs typically include the following components:

1)  Cost of Capital:  Your blended cost of corporate equity and debt financing. Manufacturing companies are generally between 7 – 12%

2)  Cost of Space:  The cost of the space (and utilities) tied up holding inventory. The text books say 2-5%

3)  Administrative Costs: People and systems costs required to manage the inventory. It includes warehouse supervision, cycle counting, inventory transaction processing, etc. 3-6%

4)  Obsolescence and Deterioration:  Scrap and rework costs of inventory that is no longer “active”: Customer cancelation, product design change, damage and corrosion, etc.

5)  Insurance / Taxes:  3-9%

6)  Material Handling:  With lots of inventory we are always moving something to get to the item we actually need. 2-5% Some companies also add the costs of all stock keeping, i.e. the cost of putting up and picking material.

7)  The Impact on Quality: The more inventory, the more handling damage, scrap, sorting, and rework required. And inventory delays discovery, thereby making it more difficult to uncover the real root cause.

8)  Lead Time:  There is a correlation between WIP inventory and response time: The more items in WIP, the longer it takes to move an item through. This can have a negative impact on market share / price due to competitive disadvantage in responsiveness.

9)  Shrinkage:  The cost of misplaced, lost, or stolen material / parts.

10)  Opportunity Costs: What could we have earned if we had invested this money?

11)  Innovation Delay:  Time to Market is critical today. Inventory of old parts or finished goods can delay new product introduction while we wait to use up the old parts before implementing the new design.

Inventory Reduction Goal %: Input the percentage reduction that you are targeting. Typically, a reduction of 20-40% is reasonable. If you would like a more exact estimate, give us a call.

“Cost of Delay (Months)” is intended to help you get people off dead center. Input the number of months that you have been discussing the transition to lean, but have not done anything substantial (corporate wide). The calculated number represents the carrying cost on the postponed inventory reduction for that period. For example, at the default values of $5 mil inventory, and a 40% reduction target, the inventory reduction would equal $2 mil. 24% carrying cost = 2%/month. At 24 months the total cost of delay equals $2 mil * 2% * 24 mo’s = $960,000!

The “Estimated Cash Windfall $” is the amount of tax-free cash that will result from the targeted inventory reduction.

Our unique process generates large amounts of up-front cash. A Lean Transition should not only be self funding. It should be a significant net cash generator!

Note: We have had three clients, to date, that have generated in excess of $150 million in tax free cash within the first eighteen months of kickoff.

“Inventory Carrying Cost Per”  Select a time period and the calculator will show the actual cost for the period chosen, based on your set of values. It was purposely designed to look like the national debt clock to show the cost impact of delay. The amount will increase each second.

Change the parameters as you see fit, then hit the “calculate” button to reflect the new results.

NOTE: If you are less than thrilled with your Lean Manufacturing results to date, you might want to check out our “Lean Bench Marking” article.  This is what you SHOULD EXPECT in the first 9-12 months!

https://www.handsongroup.com/inventory-carrying-cost-calculator/