There are various costs associated with Inventory Management which affects on overall process of materials management. We can describe all these  types/classifications of costs involved in inventory with suitable examples. Generally we categorize into three types – Purchase cost, Ordering cost and carrying costs.

    Costs Associated with Inventory Management
    1 Purchase Costs
    2Ordering costs
    3Carrying cost
    ADirect Costs
    i. Capital Costs
    ii. Storage space costs
    iii. Service Costs
    iv. Risk costs
    BIndirect Costs
    i. Business Risk
    ii. Opportunity Costs
    iii. Incremental increases in Infrastructure costs
    4Stock out cost
    5Warehousing cost
    6Damage, Pilferage (Stealing) and obsolescence cost
    7Exchange rate differentials

    1. Purchase Costs

    Nominal cost of inventory

    Purchase price of the items or raw materials or

    The production cost if produced within the organization

    It may be constant or may vary based on variations in quantity

    2. Ordering costs/Set up costs

    Also known as procurement cost

    Costs associated with the processing and chasing of the purchase order, transportation, quality inspection etc.

    Set up cost: for production within organization

    Costs to develop production schedule, resources etc.

    3. Carrying cost

    Storage and maintenance etc.

    A. Direct costs

    1. Capital costs

    Includes the costs of investments, interest on working capital, taxes on inventory paid, insurance costs and other costs associate with legal liabilities.

    depends upon and varies with the decision of the management to manage inventory in house or through outsourced vendors and third party service providers.

    Storage and maintenance etc.

    2. Storage space costs

    Includes storage requirements for all categories of inventories

    An excess of stocks requires additional capacity

    Storage space and inventory level are interrelated

    Storage and maintenance etc.

    3. Service costs

    Volume related

    Inventory insurance

    Storage and maintenance etc.

    4. Risk costs

    Vary with the nature of the business

    Obsolescence, Damage & Shrinkage

    Related to the overall role of inventory within a logistics system

    B. Indirect costs

    i. Business Risk

    Situation 1: A company carrying insufficient inventory – unable to meet & satisfy demand

    Situation 2: Reverse – Satisfies demand but increases direct costs by increasing capital cost, Service costs, storage costs and risk costs.

    Related to the overall role of inventory within a logistics system

    ii. Opportunity costs

    Range of investment alternatives

    Lack of capital availability to invest in alternatives

    Related to the overall role of inventory within a logistics system

    iii. Incremental Increases in Infrastructure costs

    Excess inventory can increase cost

    Facilities

    Transportation

    Service Companies