We began our understanding of measuring total cost of inventory management a few weeks ago by defining three key cost factors to measure prior to the launch of any significant materials management strategy initiative. To refresh your memory, they are:
- Inventory Cost
- Process Cost
- Procurement Cost
Inventory Process Costs are the costs associated with not having the right product in the right place at the right time. As I mentioned last week, many companies simply ignore these “soft costs” because they are difficult to define and even more difficult to measure, but in these economic times, savvy managers are looking everywhere they can to detect sources of profit leakage, especially those that directly affect the bottom line! Take a look at the following costs for your company when you are attempting to get your arms around this number.
How much do you pay in expediting costs?
- How much of this number is due to not having enough of the product that you need on hand?
- How much is due to transfers of product between locations?
- How much of it is due to people expediting the order when a lesser priority or less costly shipping process would work just as well?
How much does “downtime” cost you?
- In lost production?
- In labor costs?
- In expedited shipping costs to your customer?
The flip side of not having enough inventory is having too much inventory. How much is that costing you in process costs? Ask yourself the following;
How much does it cost to store inventory that you do not need?
- Cost of the building per sq foot?
- Add to that the costs of running the building (ex: air conditioning, equipment/people to manage the warehouse area, etc.)
How much money do you have tied up in “dead inventory”?
Most companies have about twice the inventory they think they have. What does that translate to for you?
- Do you know how many times each product in your inventory turns per year? If it is less than two, you have not used it in the past six months and it is probably dead inventory.
- Do you know how much inventory you have that is not even recorded in your inventory system?
- Do you know the quantity and dollar value of the “stuff” that is being hoarded?
- Do you know the market value of this “dead” inventory if you were to sell the unusable portion? That is money you could be using to fund your business or other projects to help you actually thrive in this “down” economic market.
Again, I say all of this, not to frighten you away from engaging in this type of project, but in an effort to assist in identifying and quantifying these elusive costs so that your business can thrive. I hope this encourages you to continue the process to the end where you will reap the rewards through new found profits and increased efficiencies!
In next week’s blog, we will take a look at procurement costs. Until then, remember that PM2 stands ready to assist you with your projects or questions. Just give us a call at (813) 249-0834 or visit our