Abstract
The inventory carrying cost has been assumed uniform for all products in an organization or a warehouse. This assumption is not valid for a diversified range of items in an organization or warehouse. This paper tested this hypothesis of variations in inventory holding costs in a warehouse in two industries based on the physical nature and the price of products. It is found that organizations with a wide variety of products need to calculate the inventory holding cost for each item (SKU) rather than using an average percentage cost of inventory. Inventory holding costs of items in two different organizations were calculated based on the various factors, including the actual cost of space due to the voluminous nature of the items with their existing inventory policies. A variation in inventory holding costs for each item was observed. The variation was small for an organization with homogeneous input costs, and it was large for a multi-product organization. The overall savings in the inventory holding cost due to adjusting the inventory policies through this methodology was found to be about 3%, which is significant for a big organization. This analysis will affect the decision the determining inventory carrying cost, inventory policies (e.g., stocking levels), and pricing policies (e.g., quantity discounts) for retail organizations.
Highlights
Inventory management is needed for every organization
The purpose of this paper is to present a new way of calculating the cost of holding inventory for each item (SKU) in an organization instead of using an average cost of holding inventory
The contributions of this paper are that (i) the inventory holding cost has significant variations for a multi-product organization, in the retail industry, and (ii) inventory policies should be defined at the level of items (SKU) using the actual cost of holding inventory of individual items
Summary
Inventory management is needed for every organization. The need to manage inventory scientifically is crucial for large organizations due to the value of the inventory. Inventory is the largest block of money in a manufacturing organization (Gurtu et al 2015b, 2019). Inventory items differ between organizations due to the nature of businesses, such as manufacturing, trading, and retail, and by type of industry such as automotive, healthcare, construction. Inventory and inventory holding costs are not the same across organizations, even in the same industry. Inventory items are different among organizations based on many factors such as industry, size of the operation, location, and lead-time, to name a few. The needs for inventory management and the importance of items are not uniform across industries and organizations (Nagpal and Chanda 2021)
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