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Inventory Costs: LOG 401

Identify an example of inventory in your own life. Estimate how much it costs you to hold this inventory. Estimate the "ordering cost" when you take something out. How often do you replenish this inventory and do you have any inventory policy such as first-in-first-out, last-in-first-out, etc.?

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Inventory management occurs not just at the warehouse, but in one's own life as well. Consider all the items we use that take up space in our homes. Typical items include food and household supplies. Inventory management for these items differs based on the characteristics of the items. Food could be classified into perishable items, and non-perishable items. Perishable items such as milk and fresh meat need to be refrigerated or frozen. This increases their holding costs, as a refrigerator is a prime location with operating costs including the cost of electricity and cleaning costs. Other perishable items such as bananas and potatoes do not require refrigeration, but, nevertheless, do need shelf space in a cool, dry area. Non-perishable items such as canned food, toilet paper and soap do not need to be refrigerated, and can be stored indefinitely if care is taken to prevent damage.

There is only a limited amount of space in every home, which means that owning one item may mean not being able to own another item due to the lack of space. Inventory management is a balance between carrying too much inventory and too little, while managing the limited space available. Carrying too much inventory leads to unnecessarily high inventory-carrying costs, and, in the case of perishable items, can lead to wastage if the food is not consumed in a timely manner. Perishable items require a high turnover rate to decrease wastage. Carrying too much non-perishable items could lead to ...

Solution Summary

Answered in 1,029 words. Inventory holding costs and ordering costs are calculated for a common household item. All calculations are shown. Any assumptions made are stated.