costs associated with inventory?

Question

Why is controlling turnover in
costs associated with inventory the inventory important? How can improvements in inventory management
> impact profitability?
>

Answer 1

The major costs associated with inventory are holding costs and ordering costs. Holding costs are related to inventory and the space you need to store it, a large inventory or a low inventory turnover is going to increase these costs. The way to prevent these costs is through the use of just in time inventory and lean systems which allow orders (parts) to come in exactly when needed. The ordering costs may be a problem but if you are mass producing or even just being in retail (walmart) you can excercise power over supply chain partners and greatly reduce ordering costs. the cost of storage space of inventory items which can be a $ amount per specif unit can be used to determine inventory costs. Improving inventory management or implementing JIT will allow companies to fix inefficiencies. mainly those with their suppliers to ensure smooth operations. It will also promote efficient produciton within the organization.

Look at Japan automanufacturing and walmart, top of their industries and they have lean systems and JIT.

Answer 2

Missing inventory means loss of profit, because you can't sell an item you can't find. There is the money spent on lost production (the employees spent time going to a location which didn't have the part in it and then spent time looking for the part). There is also money spent on replacing the part.