Inventory costs are critical for industrial engineers, impacting profitability. They include carrying, ordering, and shortage costs.
Carrying costs involve storage expenses and capital tied up in inventory.
Ordering costs arise from placing orders, while shortage costs result from insufficient inventory.
Lean manufacturing aims to minimize these costs through optimal inventory levels and improved processes.
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✍ Here is the transcript of the video
Inventory costs are a significant consideration for industrial engineers, as they directly impact a company's profitability and efficiency.
These costs can be broadly categorized into three types: carrying costs, ordering costs, and shortage costs.
▶ Carrying Costs
Carrying costs, also known as holding costs, are the costs associated with storing inventory over a certain period.
These include warehousing costs such as rent, utilities, and maintenance, as well as costs related to inventory depreciation, obsolescence, and insurance.
Additionally, there's the cost of capital tied up in inventory, which could have been used elsewhere in the business for potentially profitable activities.
▶ Ordering Costs
Ordering costs are the expenses incurred when placing orders for more inventory.
These include costs related to processing purchase orders, transportation and shipping fees, and receiving and inspecting the items.
In a lean manufacturing context, the goal is to minimize these costs by optimizing order quantities and frequency.
▶ Shortage Costs
Shortage costs, also known as stockout costs, occur when there's insufficient inventory to meet demand.
These can result in lost sales, decreased customer satisfaction, and potential damage to the company's reputation.
In some cases, rush orders may need to be placed to replenish stock, which can significantly increase ordering costs.
Moreover, excessive inventory can lead to quality issues due to overstacking, forklift damage, and hidden product defects that are undetectable in large lots.
It also requires a substantial infrastructure to control and monitor, taking up valuable space that could be used more profitively.
▶ Conclusions
In lean manufacturing, the focus is on reducing these costs by maintaining optimal inventory levels, improving forecasting accuracy, and enhancing supplier relationships.
This approach not only reduces waste but also contributes to a more efficient and responsive supply chain.
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