Storage costs represent the total of all costs incurred in the course of storing goods. The main components of these costs are interest on tied-up capital, ageing and wear, loss and breakage, transportation and handling, storage and depreciation, warehouse management and insurance costs.
Knowledge of inventory costs is important for determining the running costs of inventories and for calculating economical batch sizes. In both cases, they are not of interest as absolute values, but rather the inventory cost rate, which is calculated from the ratio of inventory costs to inventory value.
Inventory costs are therefore imputed costs. It is hardly possible to calculate them separately for each individual material. If necessary, certain components of this can be determined for different warehouses or different goods or product groups in order to arrive at warehousing, product or goods group-specific warehousing cost rates. In addition, not all components of inventory costs increase proportionally with stock, such as capital commitment costs. Many cost components are fixed costs that change by leaps and bounds as inventories increase or decrease, such as warehouse management costs or depreciation costs.
Our tip:
If it is assumed that changes in stock levels or economic lot sizes have a lasting effect and not just a temporary impact, then it is generally sufficient for the calculation of the running costs of warehousing and for the calculation of economic lot sizes to assume that the warehousing costs are proportional to the level of stock, i.e. with a, if necessary, discount factor. The inventory cost rate is based on stock, goods or product groups, and does not change over the inventory level.
This article is an update of our article from 2004. You are also welcome to take a look at the “original” 🙂 If you are looking for further short definitions of terms in the field of supply chain management/logistics, please use our search function in the header above. You will then find further articles under the search term “short & sweet”.
