John,
The topic of Cost of inventory in my experience is very emotive. In my IBM days - I worked with Finace for over a year and fail to get any real resolution.
The view from the East was nearer 25%, whereas the west tend to only look at the cost of money 5-10%.
In the development of any business case Cost of Inventory can bias the decision significantly. In inventory reduction there are two components - 1. the cost of inventory which is an ongoing benefit and 2. the cash released by reducing the inventory which is a one off saving. Agruments rage over whether the Cash release inventory can be included in the business case - it will depend on whether the company is cash rich?
That was where the k-curve theroy came from when looking at optimum batch sizes - it does not rely on the Cost of inventory or the cost of ordering only looking at the result of flexing the ratio - this moves it from an EOG single decion to a business decision of Inventory Value versus number of batches processes - or business speed - capability. Which in my mind is much more pragmatic.
Dr Geoff Relph
Office 01386 710110
Mobile 0776 476 9166
Costs of Inventory holding?
09 Jul 2007, 14:06