Lowest total cost
Elements of total cost include:
- Price
- Sourcing, buying, expediting, receiving, and putting away
- Transportation and packaging
- Carrying inventory
- Poor quality
- Late delivery
- Technical assistance
- Production-related
- Availability and vendor flexibility
Estimates of total cost
- Today, inventory carrying cost is typically pegged at 20% to 25% of purchase price, based on:
- Interest rate on the money borrowed to pay for the inventory
- Insurance on the inventory and the building to hold it
- Property tax on the inventory and/or the building
- Rent or lease of the building
- Value of obsolete and excess inventory
- When additional costs are included, such as for purchasing, receiving, and material handling, the total cost easily grows to more than double, or about 60%
- Price then becomes about 40% of the total cost calculation
As an element of total cost, price typically comprises about 40%
