The Five Costs of Excessive Warehousing
February 24th 2007 01:35
When you read a company’s annual report, do you look up the item Inventory, in the Balance Sheet? If you do, then this is for you.
Should business keep large or small inventories? There are costs incurred in keeping excessive inventories. What are they, though?
The first cost of excessive inventory is the forgone use of that money there represented. I learned this one from my mom when I was still a kid. In fact, money tied up in excessive stock is dead money and cannot be used for anything else, not even to generate interest.
The second cost of excessive inventory is rent or lease costs. Warehousing excessive stock incurs lease expenses.
The third cost of excessive inventory is labour. To move goods around requires labour and this has a high cost.
The fourth cost of excessive inventory is transportation. Moving items, whether to another warehouse or from the supplier to you, costs you money.
Finally, the fifth cost of excessive inventory is management. Operating excessive stock requires management time.
Obviously, you can avoid all this by ordering the items you just sold and adopting Just-In-Time.
Should business keep large or small inventories? There are costs incurred in keeping excessive inventories. What are they, though?
The first cost of excessive inventory is the forgone use of that money there represented. I learned this one from my mom when I was still a kid. In fact, money tied up in excessive stock is dead money and cannot be used for anything else, not even to generate interest.
The second cost of excessive inventory is rent or lease costs. Warehousing excessive stock incurs lease expenses.
The third cost of excessive inventory is labour. To move goods around requires labour and this has a high cost.
The fourth cost of excessive inventory is transportation. Moving items, whether to another warehouse or from the supplier to you, costs you money.
Finally, the fifth cost of excessive inventory is management. Operating excessive stock requires management time.
Obviously, you can avoid all this by ordering the items you just sold and adopting Just-In-Time.
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