· What is your company’s Inventory Carrying Cost rate? (Ask your Director of Logistics or the CFO. If that’s not possible, provide an estimation using all 4 categories presented in class.) Do you think it’s an accurate computation, a good estimate or a not-even-close estimate? Recommend one action that should be taken to improve the accuracy of this number.
Reply to the students response in 150 words and provide 1 reference
Information received from my company is that our Inventory carrying cost is about 22%. In discussion with the VP, he indicated great confidence with the number as we utilize a global ERP system that integrates all information to determine that figure.
A company’s inventory carrying cost can be described as the computation consisting of all the monetary resources in a company divided by the average annual proceeds. The monetary resources must include taxes and storage space of the inventory. The importance of inventory carrying cost is to determine how low or high the supply value is. This further determines the profitability of a company on an annual basis. Although this computation is not always reliable, a business or organization can ascertain that inventory management is part of company policies to increase sales and profitability.
Last in First Out (LIFO) and First in, First out (FIFO) are two types of inventory management. According to Stickney et al. (2009), companies in the US are always faced with decisions regarding which type of inventory management to use since both have advantages and disadvantages. However, LIFO is better because it computes tax in financial reports. Using either of these methods may provide a company with the required results, but it does not determine whether the inventory-carrying cost is accurate.
A good strategy targeted at mitigating this problem would be to keep the inventory levels as balanced as possible. An article titled, “How to Improve Inventory Carrying Costs and Management in the Supply Chain” states that control systems such as the computation of regular safety stock can also provide precise and reliable results. Another approach would be to have minimal inventory costs to pay off any pending loans and debts. This way, the company’s inventory and profit will increase. In essence, keeping company procedures and processes as simple as possible could also increase the accuracy of inventory cost estimation. As a consequence, this has the potential of also decreasing employee turnover and upsurging work motivation.
In conclusion, the inventory carrying cost provides a wide scope of what goes on in a business or company. For this reason, effective communication among employees and leaders should be paramount. Every worker should identify the needs of the company and deliver quality services. It is important to note that every business must also have a well-developed computer system to calculate the company’s inventory carrying the cost.