Calculating Inventory Costs: Holding Costs & Lost Sales

www.driveyoursu... The following video explains the two main cost drivers of inventory; high carrying costs & lost sales cost of inventory

[@Driveyoursuccess]

Thanks for your feedback. Let me know if there is any topic you would like me to cover.

[@narendrarawat7764]

Being a cost accountant in india ,I support u because of ur knowledge.

[@zendorphan]

In my industry, we look at total demand (as it relates to re-ordering inventory) as: Sales + Back Orders + Buyouts + Lost Sales. Lost sales, in our business, occur when set up part numbers are out of stock, the customer can't wait for the order, and we can't buy them locally for resale. The costs you outline to expedite an order are more like stock-out costs. However there are additional costs to lost sales as it relates to a customer's willingness to return and try to purchase that part again after an unsuccessful first attempt (based on the possibility their urgent need is a pattern). It may be defined differently in other industries.

[@Driveyoursuccess]

Hi Mike. I have done this analysis many times. First, you must define your specific inventory carrying costs. Most assign 3% to their monthly inventory value on hand - but yours could be higher or lower. Second, when inventory turnover rates (sales) increase, you lower your carrying costs by reducing costs of financing, obsolescence, damage, pilferage (theft), counting etc. Please search on Google for "Inventory Carrying Costs Versus Higher Volume Purchases" - it's on my site DriveYourSuccess

[@Catfishpie4eva]

Well done! What a great explanation of inventory! Thanks

[@Driveyoursuccess]

Thanks for the feedback.

[@joeystephens8919]

Can someone help explain… Inventory Carrying Cost supposedly helps you identify when you have too much inventory, or holding it too long. However, the figure drops as you increase the inventory you have on hand. How is this helpful? Is it intended to work in tandem with turnover rate? Example Holding sum / inventory value = holding cost Scenario A $10,000 / $20,000 = 50% (bad) Scenario B (more stagnant inventory) $10,000 / $40,000 = 25% (good) What gives?

[@DanielRamBeats]

Very well explained, thank you!

[@mikejacques5706]

thanks Ian. got it but my question is rooted more around inventory accuracy. How does inventory accuracy impact carrying costs? e.g. if I move my accuracy from 75% to 95%, how do I improve carrying costs, sales, cash flow?

[@lawrenceelliot7422]

thanks for watching this video it great tutorial, thanks

[@jolieobi]

Explained well. Thanks

[@mikejacques5706]

Hi good video - wondering if you have done research on correlation between inventory accuracy and the following - carrying costs, cash flow, sales lift. So if my in store inventory accuracy goes up from 70% to 90% then - how much cash I am freeing up - how much is my carrying cost lower by - how much can I convert into sales

[@Joe.k.e]

What's the easiest way to calculate 1-D (per-unit & freight cost) I'm trying to do something like this overall for my current employer, but I don't think they have a number for that.

[@nambalanambala8438]

What's the formula for Holding cost?

[@thyvivek]

Watching it in 2020. #Corona

[@TheSachinmrig]

Thanks a lot

[@pidroshorts]

i loved t his video however, the sound is very weak. thanks Ian for the idea.

[@BrianSy]

great tutorial

[@Driveyoursuccess]

Thanks a bunch Brian. Let me know if there is anything else you would like me to cover.

[@ubaid7713]

+Ian Johnson is there stock out cost analysis with probability analysis & holding cost, where a company can minimize cost??

[@TheNewWizard98]

The balance point would be when carrying cost = Lost sales cost

[@user-py4ic3iq9f]

Besides form carrying cost vs. lost sales, are there other challenges company might face when replenishing? and also how about the challenges exiting the market?

[@Driveyoursuccess]

Replenishing inventory is another issue entirely where the company's inventory purchases must match existing demand for their own finished goods. There isn't enough room here to go over all of those issues, but there are other videos of mine that explain what you need to look at (EOQ, Forecasting etc.)

[@leyr501]

Replace my teacher.