We have seen that carrying (or holding) Inventory has a financial cost to a business. However, there is also other costs associated with Inventory. These include:
- Cash tied up in Inventory that could be used for other areas of the business – Opportunity Costs);
- The cost of funding this cash. Often the cost of capital for an organisation is relatively high, between 5 – 10% pa
- Cost of obsolescence. If the demand for an item drops significantly and the organisation is left with a surplus, then it is prudent to depreciate the value of that item. In the worst case scenario the full value of the stock needs to be written-off which directly impacts the Profit and Loss.
