Inventory is Very Expensive
A classic article in the Supply Chain Management Review does a great job of overviewing the cost components of inventory and breaking down what the total cost of ownership really is.
Simply put, the following costs are associated with holding inventory:
- Product Costs
- Warehousing
- Depreciation
- Obsolescence
- Pilferage
- Damage
- Insurance
- Taxes
- Capital Cost
- Administrative Costs
And that's why, in an average scenario, in an average organization, the total cost of holding inventory is over 30% of the base purchase cost.
And that's why you need to examine that special volume discount carefully next time your supplier offers you a special, limited-time, "buy more now, save more now" offer. Chances are, the supplier is just trying to pass their inventory costs on to you ... which far exceed the meager discount they are offering.
Posted by the doctor at 5/5/2009 1:01 PM 
Categories: Finance, Inventory
Tags: Inventory Management Costs
Categories: Finance, Inventory
Tags: Inventory Management Costs
In other words, if you have inventory for more than one year and nowhere near of selling it (or converting it into a sellable item) the best thing you can do is just sell you inventory even if it is at a 50% discount.
But the problem is, the finance people are likely to object with such as big loss in the books. A catch 22 situation
One way of looking at it.
Another way of looking at it is "don't play the points game". Third Party Inventory / Warehouse Management providers often like to quote based on basis points on the total cost or value of the inventory, and like to win your business based on lower basis point quotes, but you can't capture the true cost of inventory as a simple percentage.
For example, an iPod will cost about $200 and a large pallette of cheap copy paper will cost about $200. As one takes up about 0.5 cubic feet and the other about 500 cubic feet, one will be 5000 times as expensive to store from a warehousing cost perspective. Now, it's true that the former will require a secure area (due to the much higher theft risk), but you can't simply apply an average inventory carrying cost to both products and get an accurate inventory cost. To understand the true cost of inventory, you have to do a cost model, and, as you point out, if it's costing you more to store than to dispose of at a 50% discount, dump it and cut your losses.