Cost of inventory can occur on components/raw materials and on finished product.

  • Space required to store bulky items
  • Perishable items with a best before date
  • Items that require special storage conditions (such a climate-controlled environment)
  • Potential of accidental damage during storage
  • Administration for managing inventory
  • Capital tied up in inventory

Ideally components would be ordered on demand and delivered just in time, and stock would proceed straight to distribution, and established volume manufacturing businesses  (such as Toyota) are able to move towards that ideal because of a high level of knowledge about their sales, and extremely well-controlled production processes, with carefully managed supply chains.

For everyone else, the challenge is to minimise the inventory costs by managing the supply and production to analyse the most cost-effective strategy. This will evolve as volumes increase and the metrics change.