Carrying Cost

Factors Affecting Inventory Carrying Cost
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Factors Affecting Inventory Carrying Cost
A forecast on company costs by the financial chief officer indicates that the costs of the company will be increasing at a high rate. Reducing the cost of goods will help subvert the expected future trend. This is because the cost of goods sold combines the cost of labor and materials which form a larger percentage of costs for most companies. On the other hand, the supplier has advised the company to take a three-month amount of raw materials into inventory instead of a monthly purchase.
There is a need to identify the cost implications of the form of inventory suggested by the supplier. The cost of warehouse labor is regarded as constant but is subject to change based on the number of orders received. A suggestion by the chief financial officer is to reduce the cost of goods which entails reducing raw material and labor cost. One of the factors of holding too much inventory for three months is the holding cost. According to Durlinger (2012), holding a lot of inventory carries holding risk cost which is related to obsolescence. There is also a need to consider the product-cycle since determines the obsolesce cost.
Another factor is the storage cost where the company needs to determine if it will outsource warehousing services or if the company’s warehouse will be enough. We also have ordering costs where the company spends time and funds to place an order. The ordering costs are considered constant since they mostly consist of wages.

There is also the cost of transporting orders where the supplier can offer to pay for transport for a full track load (Durlinger, 2012). Ordering more products from the supplier will increase holding cost but reduce transportation costs. There are also costs for receiving orders where personnel is expected to provide administrative services and perform checks for each order. This implies that labor costs can decrease when the number of orders is reduced.
It has been established that most costs of inventory are fixed and show limited variation with the number of orders placed. However, the company will be able to reduce transportation cost when it decides to order a three-month inventory all at once. Also, the company will attract risks of holding inventory.
References
Durlinger, P. P. J. (2012). Inventory and holding costs: A white paper approach for managers. Durlinger consultancy.