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1. Explain how to get an accurate measure of inventory carrying costs and why this would be important. Inventory carrying costs are one of the most important things that a firm needs to take in to consideration when following marketing logistics strategies. Inventory carrying costs can be associated as costs that a business incurs from the amount of inventory that they have to store for any given period of time. As stated by Lambert this is one of the highest costs associated with logistics. Because of the high inventory costs, the management team of a firm needs to take this in to consideration and calculate an accurate measure of the inventory carrying costs associated with their corporation.
In doing, so management may be able to devise a plan to reduce some of these costs and create a more efficient less costly inventory plan. In the text, it states that the inventory levels in a firm affect the corporate profits obtained from the sale of goods. I have learned that many companies do not take the time to calculate these costs. Instead, they use the industry averages. This is not a good approach to creating lower inventory carrying costs. A Company needs to be able to create an environment where they can obtain the highest profit and have the least amount of excess inventory possible.
The cost of a company's inventory should not include anything more than costs based on the amount of inventory you have. Some components are capital costs, inventory service costs, storage space costs, and inventory risk costs (Lambert 153). I will discuss in detail a couple of the inventory carrying cost components. I feel that the capital costs and the storage space costs are two very important components associated with inventory carrying costs. Storage and space costs are considered as the costs that are associated with storing goods for any given amount of time. These costs generally very with the amount of products that are moved to and from storage facilities at any one time.
There are four general storage space costs plant warehouses, public warehouses, rented warehouses, and private warehouses (txt 157). Plant warehouses generally have costs that vary with the number of products that are taken in and out of storage. Public warehouses usually base their costs on the number of products that are moved into and out of a warehouse and the amount of inventory in storage. Rented warehouse space is generally contracted for a certain period.
The costs associated with a private warehouse are just the fixed costs of the company since they own the warehouse. The other two components, which are the inventory service costs and risks. They cover expenses such as taxes, insurance, obsolescence, damage, shrinkage, and relocation costs. I feel that a company needs to pay close attention to all cost and take in to consideration the effects they may have on the cost of carrying inventory. The main goal of a firm is to create a way to reduce inventory levels. In assessing the cost of inventory, a firm is able to realize that excessive inventory levels provide no benefit to a firm.
In-fact they just create a higher carrying cost. By reducing these costs, the money could be used for another purpose where it will obtain a higher expected rate of return. (txt 161) This is a very important factor for a firm to understand in order to maximize profit and expected rate of return. By creating an efficient and accurate inventory carrying cost, the firm is able to save money and to create a lower cost of money for the business 2. Describe the relationship between inventory carrying costs and inventory turns.
What is the business lesson in this? One could say that the effects on inventory carrying costs and inventory turnover are very closely related. I believe this to be an adequate statement. Inventory carrying costs can be associated as costs that a business incurs from the amount of inventory that they store and the amount of time that it is stored. On the other hand, Inventory turnover is considered another form of the measurement on inventory performance. Just like with the level of inventory carrying costs, I associated the fact that the higher the rate that inventory moves through a firm the greater the amount of inventory turnover will be created.
In comparing the carrying costs to the turnover rate, a higher turnover ratio will result in a faster product cycle occurrence. This is a better more efficient method than retaining products in storage for a long period. When comparing the inventory turnover rates with the carrying and storage costs of products, a company will be able to improve their long-term profitability on their products. Lambert states in the book that the inventory turnover as compared to the carrying costs will have the greatest impact if the inventory turns less than six times per year. After about eight turns, a product inventory carrying costs verses the turn seems to level off (txt 166).
Based on the graph in the text this statement is a good example of the turns associated with the carrying costs on a product. In reviewing this graph, I realize what the authors mean when they state that after about eight inventory turns the carrying costs begin leveling off. Based on text books example calculating the costs on a per item basis you would want to take the carrying costs of the items and divide out the inventory turns to get the costs on a per item basis. The turnover rate on this chart was calculated on an inventory carrying cost of thirty dollars for the period of one-year (12 months). By reviewing the graph I was able to realize that the more turnovers a product has in its cycle the lower the carrying costs associated with the product. However, this is not always the best way to gain profitability on the returns.
If the turnovers get to big and the carrying costs associated with the products are to low this could create the inventory levels to fall below the optimal levels for the industry (Lambert 166). On the other hand, if a product only makes a turn of about one time per cycle all of the carrying costs for the product are retained. In this instance, if the product were only to turn one time the carrying costs would be thirty dollars. This is a good example of how a profitable retailer can be placed in to a loss position because of the high carrying costs of a product that have a fast turnover (Lambert 167). In assessing the inventory carrying costs verses the inventory turnover I feel that a business needs to take a cost benefit analysis of the inventory levels on hand and what the costs are. In doing so a firm will be able to realize the amount of inventory that is needed and what is excess.
By eliminating the excess inventory, the carrying costs of inventory will decline resulting in lower per item costs. Besides the lower ones costs the higher the rate of profit return that is realized on the products. As stated in the section on inventory carrying costs the higher the amount of inventory the more money that is tied up that could be used for another purpose (Lambert 153). The amount of inventory turnover can be associated with poor management. If the carrying costs on inventory are to high and the inventory turns are to great then firm's profits will have declined to the point of loss. Based on this statement a firm has to create a situation where the carrying costs are low and the inventory turns do not flat line. 3.
What constitutes JIT, and why would it be a good idea? Just in time inventory (JIT) can be viewed in a few different forms. However JIT is basically considered as an inventory management philosophy aimed at reducing waste and redundant inventory by delivering products, components, or materials just when an organization is going to need them (txt 28). In reading in to the whole concept of JIT it seems as if it is a system where you are combining all of the logistics activities in the company into a smaller more concise system. The main goal of implementing the JIT system seems to try to cut down on wasted inventory in storage resulting form over production and other factors such as obsolesce. By implementing the process of JIT, the management's view on the company will change and their main goal will be a continuous ongoing effort to improve the company's logistics system.
The JIT system is a philosophy that someone has implemented in order to create a better, faster, stronger working environment for his or her company. In general, the process of JIT can have many benefits to a firms logistics system. Some of the benefits that are implemented through JIT are: Using JIT, many companies have found that they were having improved inventory turns, their warehousing costs and space were being reduced dramatically and the response time for customer orders was increasing. A few other things that can be related to the JIT process are things such as a lower rate for transportation and an improvement in the quality of the goods that are being sold (txt 199). Th...
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Research essay sample on Rate Of Return Inventory Turnover
