Warehouse Operations – Carrying Cost
Due to the expected increase of the cost of funds, a major supplier has offered a sizeable discount on a condition that the company purchases three months’ raw materials. Buying raw materials used for three months will increase the carrying costs and increase the burden on the company’s finances. First, the warehouse cost will increase if the company buys three months’ raw materials (Brigham & Daves, 2013). Rent will increase due to increased space, also, salaries for additional staff will also have to be paid and operation costs will also rise (Brigham & Daves, 2013). Secondly, wear, tear and shrinkage will increase. The value of goods at risk of theft and damage by weather will increase (Mahadevan, 2009). Additionally, more goods will likely become obsolete, leading to wastage of resources.
The cost of handling the items in inventory will increase. More machinery and personnel will be required to handle the raw materials while in the warehouse. The company will also spend more on insurance and taxes on the inventory (Mahadevan, 2009). The opportunity cost of purchasing three months’ inventory should also be considered. Whereas, the amount used to purchase inventory for the two extra months can be used in other projects of the company to gain profit (Brigham & Daves, 2013). Hence, instead of the company’s buying extra inventory, it should engage in determining the optimum inventory that minimizes costs (Mahadevan, 2009). Hence, factors that affect the carrying cost of the company are the cost of preservation, cost of obsolescence and deterioration, total inventory cost, cost of handling items in inventory and the physical space utilized that includes utility costs, taxes, rent and insurance.