Balancing Carrying Costs against Order Fill Rates

By: David Thikoll, SBS Desert Mountain

Operating a discrete manufacturing facility efficiently requires vigilant attention to supply chain procedures to protect and maximize margins. Discovering ways to streamline production processes and reduce inventory carrying costs must be a top priority in to achieve financial goals and profitable, sustainable growth.

Therefore, understanding the four major components of inventory carrying costs and how to diminish their impact on company resources can expose problem areas within the supply chain. Often, inefficiencies can be eliminated with a distribution management software solution that has the ability balance costs with order fill rates, customer satisfaction and profitability.

Capital Expense

Capital expenses refer to the purchase order and delivery dollar amounts for raw materials, batch parts, components, or other production goods needed for operations. These commodity items are subject to extreme volatility; the market often fluctuates. It is possible to mitigate price risk through order negotiations, quantity agreements and supplier partnerships with shared risk.

Taxes and Insurance

Taxes are assessed on warehoused materials including raw materials, work-in-progress, operating supply, and finished goods inventory, and levied according to regional authorities and local laws. Insurance costs vary according to the amount of estimated risk involved in maintaining stock levels at a specific facility.

Insurance costs can be diminished slightly by the implementation certain safeguard improvements such as security cameras, fire prevention systems, and employee safety programs, but taxes can only be decreased by reducing warehoused materials, and streamlining production and distribution procedures to achieve minimum holding times.

Obsolescence

Obsolescence can occur through miscommunication events or when duplicate PO’s are issued, creating an excess of materials, if current production levels are insufficient to maintain product development rates, resulting in obsolete components, or when damage occurs to materials through mishandling, or improper storage.

Employing a customized software program can reduce inventory levels and significantly improve distribution management procedures, by decreasing overall stock levels, as well as organize and coordinate timely replenishment scheduling.

Storage Costs

The labor involved in organizing and handling inventory factors into product costs. These storage costs refer to the facility maintenance expenses, specifically the lease and utilities rates incurred from warehousing inventory.

Calculating the best replenishment points, economic order quantities, and determining when and how much to order requires constant monitoring of inventory on hand; sadly, this often becomes the responsibility of multiple warehouse personnel.

Fortunately, there are innovative distribution management software programs that incorporate lean manufacturing principles and effective inventory management, allowing senior staff members the freedom to view every aspect of supply chain operations faster and easier and enabling them instant access to valuable performance metrics.

These customized systems work at every level of operations, are easy to incorporate, and possess the unique ability to offer reduced inventory levels and decrease carrying costs. For more information on how to stay ahead of Today’s Distribution Challenges, view this 30 minute free On-Demand Webinar.

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