Inventory is Very Expensive

A classic article in the Supply Chain Management Review does a great job of overviewing the cost components of inventory and breaking down what the total cost of ownership really is.

Simply put, the following costs are associated with holding inventory:

  • Product Costs
  • Warehousing
  • Depreciation
  • Obsolescence
  • Pilferage
  • Damage
  • Insurance
  • Taxes
  • Capital Cost
  • Administrative Costs

And that’s why, in an average scenario, in an average organization, the total cost of holding inventory is over 30% of the base purchase cost.

And that’s why you need to examine that special volume discount carefully next time your supplier offers you a special, limited-time, “buy more now, save more now” offer. Chances are, the supplier is just trying to pass their inventory costs on to you … which far exceed the meager discount they are offering.