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
- 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.