The following video outlines the two main costs of inventory. The first is high inventory levels with low sales. These costs include the cost of money, costs of obsolescence, damage, pilferage, counting, insurance, storing and handling and warehousing.

The second inventory cost includes losing sales because there's no inventory. In this case, the costs are measured by lost gross profit, lost sales, lost customers and eventually, lost market share. However, it's what happens when companies don't want to lose a sale that costs the most.

When encountered with a stock out, a company will often rush parts into their facility. This means incurring higher freight costs and expedite fees. If it's a manufacturer, they'll pay for overtime to receive, inspect, manufcture, package and ship the product out to the customer. In addition, if the customer is upset, then the company will have to cover the freight cost. This is why it costs money to not have inventory.

The video outlines a simple concept of the Bell Curve of inventory management where a company has high inventory with low demand and then has high demand with low inventory. Similar explanations include the BullWhip Effect or Forrester Effect. This principle explains how small changes in consumer demand have drastic impacts on a given supply chain. The video above does not explain the Bullwhip Effect, but it does follow a similar path.


[ Ссылка ] The following video provides a graph of the two main costs of inventory.

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