a. Cost of Loss, pilferage, shrinkage and obsolescence etc.

b.    Cost of Logistics

c.    Sales Discounts, Volume discounts and other related costs.

1.    Ordering Cost

Cost of procurement and inbound logistics costs form a part of Ordering Cost. Ordering Cost is dependant and varies based on two factors - The cost of ordering excess and the Cost of ordering too less.

Both these factors move in opposite directions to each other. Ordering excess quantity will result in carrying cost of inventory. Whereas ordering less will result in increase of replenishment cost and ordering costs.

These two above costs together are called Total Stocking Cost. If you plot the order quantity vs. the TSC, you will see the graph declining gradually until a certain point after which with every increase in quantity the TSC will proportionately show an increase.

This functional analysis and cost implications form the basis of determining the Inventory Procurement decision by answering the two basic fundamental questions - How Much to Order and When to Order. How much to order is determined by arriving at the Economic Order Quantity or EOQ.

2.    Carrying Cost

Inventory carrying involves Inventory storage and management either using in house facilities or external warehouses owned and managed by third party vendors. In both cases, inventory management and process involves extensive use of Building, Material Handling Equipments, IT Software applications and Hardware Equipments coupled managed by Operations and Management Staff resources. Inventory storage and maintenance involves various types of costs namely:

·      Inventory Storage Cost

Inventory storage costs typically include Cost of Building Rental and facility maintenance and related costs. Cost of Material Handling Equipments, IT Hardware and applications, including cost of purchase, depreciation or rental or lease as the case may be. Further costs include operational costs, consumables, communication costs and utilities, besides the cost of human resources employed in operations as well as management.