Calculate Inventory Carrying Cost
Here’s A Great Tool We Had Custom-Built For Our Visitors!
It will help you calculate the actual cost of inventory and help you see the opportunity Lean Manufacturing and process improvements bring to significantly reduce your loses due to inventory expense.
It’s Free and easy to use! You may want to enlarge it with the little + sign in the top right corner and let it run during your next meeting on inventory reduction. It should give your staff a real sense of the problem and the opportunity.
Just Fill-in Your Data and Click “Calculate”
Current Inventory $: Input your current total inventory (dollars)
Carrying Cost of Inventory %: Input your annual carrying cost percentage. Carrying costs are typically between 24% to 48% per year.
They include 1) the cost of money (your corporate cost of capital), 2) the cost of the space tied up to hold the inventory, 3) the administrative costs to manage the inventory: cycle counting, inventory transactions, etc. 4) the cost of obsolescence and deterioration (the design changed, the customer reneged, the product corroded, etc.) 5) the quality impact: The more inventory, the more scrap, sorting, and rework required, and inventory delays discovery, thereby making it more difficult to uncover the real root cause. 6) There is a correlation between WIP inventory and response time: the more items in WIP, the longer it takes to move an item through. 7) Insurance and taxes. 8) Material handling. With lots of inventory we are always moving something to get to the item we actually need. 9) More material movement means more handling damage 10) Inventory delays innovation, e.g. we must wait until the old parts are used before implementing the new design, 11) Lost material / parts (we know it’s here somewhere!), etc.
Inventory Reduction Goal %: Input the percentage reduction that you are targeting. Typically, a reduction of 20-40% is reasonable. If you would like a more exact estimate, give us a call.
“Cost of Delay (Months)” is intended to help you get people off dead center. Input the number of months that you have been discussing the transition to lean, but have not done anything substantial (corporate wide). The calculated number represents the carrying cost on the postponed inventory reduction for that period. For example, at the default values of $5 mil inventory, and a 40% reduction target, the inventory reduction would equal $2 mil. 24% carrying cost = 2%/month. At 24 months the total cost of delay equals $2 mil * 2% * 24 mo’s = $960,000!
The “Estimated Cash Windfall $” is the amount of tax-free cash that will result from the targeted inventory reduction.
Our unique process generates large amounts of up-front cash. A Lean Transition should not only be self funding. It should be a significant net cash generator!
Note: We have had three clients, to date, that have generated in excess of $150 million in tax free cash within the first eighteen months of kickoff.
“Inventory Carrying Cost Per” Select a time period and the calculator will show the actual cost for the period chosen, based on your set of values. It was purposely designed to look like the national debt clock to show the cost impact of delay. The amount will increase each second.
Change the parameters as you see fit, then hit the “calculate” button to reflect the new results.