Effective Replenishment Parameters, Part 4:  The Carrying Cost

The cost of carrying inventory (or “K” cost) includes all of the costs you incur by stocking material in your warehouse:

• Moving material from the receiving dock to the proper bin location and shifting it to other warehouse locations as necessary

• Insurance and possible taxes on the inventory

• Rent and utilities for the portion of your warehouse used to store material

• Physical inventory and cycle counting

• The risk of inventory shrinkage and obsolescence

• Opportunity cost of the money invested in inventory (That is, how much could you make if the money tied up in inventory was invested in a relatively safe, income-producing investment. Or, if you finance your inventory purchases, the amount of interest that you pay the bank.)

The annual amount of these costs is accumulated and divided by the average inventory investment. The K cost is expressed as a percentage. Think of it as the cost of maintaining a dollar’s worth of inventory in your warehouse for an entire year. Typical K cost values currently range between 15–23 percent. Your Microsoft dealer can provide you with a questionnaire developed by EIM that will help you calculate your company’s specific inventory carrying cost.

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