Balancing Cost and Inventory with MRP
By Johnny Nugent
The goal of inventory control is to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. Manufacturing businesses can’t afford to lose money by way of wasting inventory in warehouses. The goal of inventory management is not to hold more inventory than necessary.
Reasons for Excess Inventory
- Quantity discount
- Extended learn time
- Ensure to meet demand
- Keep operations running and avoid down time
- Evade cost increase
True Cost of Inventory
Although these seem like good reasons to purchase extra inventory, you must look at the true cost to determine if you are really saving money or not. There are three types of costs that make up the total inventory cost:
1.) Ordering Costs
This includes the cost of the ordering process itself.
2.) Carrying Costs
Carrying costs are all the costs associated with holding the inventory including: capital costs (everything related to the investment from interest payments to the opportunity cost of the money invested in the inventory instead of another investment); storage space costs (the cost of the building, maintenance, utility expenses, property taxes); inventory services costs (the cost of insurance, IT hardware/software, physical handling); and inventory risk costs (the risk that the items might fall in value while they are being stored).
3.) Stock-Out Costs
Also known as shortage costs, these are the costs incurred from not being able to meet a demand from current inventory. The stock-out costs consist of internal costs such as labor time wastage and lost production, as well as external costs such as customer loss of loyalty or general decline in the company’s reputation.
Conclusion
As you can see, the true inventory cost is more than just than just the cost of goods sold or raw materials, which is why inventory control and the perfect balance between cost and inventory is so important in the manufacturing industry.
One tool to help with inventory management is an MRP suite. This gives manufacturers the ability to match supply with demand at each stage of the product life cycle. Visibility’s MRP module looks at order quantities period by period and allows discrete ordering. Contact us to learn more about how Visibility helps manufacturing companies with inventory management.
