COST OF INVENTORY
发布于:2008-5-21 已被阅读:次 

COST OF INVENTORY
  
   by
  
   BRIAN WILLCOX
  
   of
  
   ACTION MRPII
  
  
  
  
  Inventory is something that all companies need. The difficult question to
  answer is ’How much do they need?’
  
  In manufacturing companies, although there are a few exceptions, material
  is usually between 60 - 85% of cost of sales, depending upon the industry.
  In electronics, it would be about be about 85%, with overheads about 12%,
  and direct labour 3%. These percentages indicate where management attention
  should be directed!
  
  As inventory is by far the single greatest cost, we need to examine the
  four causes that contribute to that cost.
  
  THE ORDER PROCESSING/SET-UP COST
  
  Many people are not aware of the real cost of placing and processing a
  purchase order. The total cost should include the cost of purchasing, goods
  receiving, incoming inspection and accounts payable. Each of these
  departments only exist because we need material. If you divide the total
  budget for these four departments by the number of orders placed during a
  year, it will give an average cost per order. Some divide by the number of
  receipts to give the average cost of a receipt, as 3 out of the four costs
  are related to a receipt. The average cost of a receipt for companies using
  the traditional receiving process is usually between $40.00 and $80.00,
  depending upon the process used.
  
  For manufactured items the equivalent cost is known as set-up. This
  includes all the costs that are not related to the order quantity, viz
  preparing the order paperwork, processing and tracking the order
  operations, the cost of setting up the machine, and first off inspection.
  
  This total ordering/processing cost has to be carried by the quantity of
  items resulting from the process.
  
  INVENTORY CARRYING COST
  
  Costs result from the fact that the item is in stock. These are real costs
  which must be accounted for. The total cost is made up of several elements.
  
   * Cost of capital
  
   This is charged at the "Lost opportunity cost" and not the interest
   rate. Typically 25% "Lost opportunity cost" is the return that could
   have been obtained if the capital had been invested in other than
   inventory.
  
  
  
   * Insurance
  
  Because you have the material, it must be insured. Typically 1%
  
   * Pilferage and spoilage
  
  This varies by industry, but is usually a minimum of 2%
  
   * Obsolescence and deterioration
  
  This is inventory held for which there is no requirement or is unfit to
  sell. Typically 1%.
  
   * Storage and handling
  
  This includes the total warehousing facility. Typically 6%
  
  The total cost to the company is 35% per annum of the value of inventory
  held, or 3% a month.
  
  STOCK-OUT/BACK ORDER COST
  
  Because a company cannot afford to keep sufficient stock to meet every
  demand, stock-outs must occur. Stock-outs result in either a lost sale, or
  the customer is prepared to wait, so his order goes on back order.
  
  A lost sale results in the business going to the competition. Back ordering
  a demand causes additional costs, viz extra paperwork, the time spent
  handling this extra paperwork, a system to handle the back orders, extra
  delivery notes, and invoices, extra packing and delivery costs. In many
  cases, the average cost of processing an individual order line item that
  has been back ordered can be as much as $20 to $30. Often more costly than
  the sale value of the item back ordered.
  
  EXCESS AND OBSOLETE STOCK
  
  Excess inventory is the quantity of material in stock or on order that is
  greater than the anticipated demand for an agreed time period.
  
  Obsolete inventory is that for which there is no anticipated demand. This
  inventory typically occurs due to model run outs, engineering change notes,
  or suppliers minimum/multiple order quantities. Companies tend to be
  reluctant to write off this value as it is a loss in the books of
  accounting, and so affects the profit.
  
  SUMMARY
  
  In simple terms, it tells us that inventory is our biggest cost and the
  more we have, the higher our cost. To keep our costs down we should have
  only what is needed, when it is needed. This is why many companies appoint
  a Materials Management Specialist to control the company’s inventory.

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