Inventory Carrying and Transportation Costs Factors

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Inventory Carrying and Transportation Costs Factors

Geographical specialization, dissociating, balancing demand and supply, and uncertainty are the prime functions of inventory. Geographical specialization is a function that allows distribution in the company according to manufacturing, preserving the places, stages of the process, and creation, allowing the creation of value in the specialization they make (Hensel, 2016). For example, Boeing has a company in Bragg, N.C. for Apache helicopters and has one of its factories in South Carolina. The factory is about 3 hours from the company and helps every moment a part is not available in one place for it can be received from the other in a short time.

Another function is dissociating or decoupling, which refers to the separation of the different operational units to not have to work at the same pace as others. Two factories do not need to coordinate their operations, and in this way, each unit of work can operate at its most efficient pace and stack the excesses if needed (Holmström et al., 2017). Using the example above, Boeing is a company with factories around the world that manufacture the same types of parts and aircraft at different rates.

The third inventory function, balancing, means that supply availability is made to match the products demand. For instance, the ongoing assessment of relevant commercial aviation industry data shows that supply and demand for new commercial jetliners remain in balance. They were finally buffering of vulnerabilities which included short-range variation in one or the other interest or recharging. Its requirement results from uncertainly pertaining to future sales; the uncertainties are delays in the performance cycles length and excess demand of the forecast during the performance cycle. The function of buffer stock inventory is to provide a specified degree of protection against this uncertainty type.

Inventory costs are costs related to storing and maintaining its inventory over a certain period. Carrying costs are central for a static viewpoint on inventory and are narrowed down to storage space costs, inventory risk costs, and capital costs. Storage cost is an inventory cost that must be accounted for, and they are costs associated with the facility to store goods or facilities expenses. An example would be to lease a warehouse to store repair parts for aircraft. Inventory risk costs are insurance costs that must also be accounted for. If risks such as theft or fire breakout occur, the insurance will help replace the lost cash in damaged inventory.

The last account category of inventory carrying costs that must also be clarified is capital cost. All items are accounted for, and in case of obsolesce, the items prices should be tracked and placed back in proper accounts. This is to account for those produced, but no revenue is returned to the production. For example, rotor blades in the aerospace industry have a shelf life and must be inspected and refurbished. In case the rotor blades have stayed for long in the inventory, they are to be returned as they can no longer go onto aircraft.

The main factors that affect transportation costs are weight, distance, and demand for freight. Air transport is the most expensive of all transport modes due to high infrastructure, operating, and maintenance costs. It is suitable for high-value cargo, perishable, needed urgently at longer distances, and light in weight. Trucks are most flexible, as they can navigate most roads and deliver goods at the doorstep faster but higher cost than rail. They are less safe than rail since blockages and weather conditions can restrict their movement. Rail lines are the least expensive, the most secure, and the fittest for conveying colossal burdens. However, due to operational restrictions, they are slower and cannot reach places that are not connected by rail.

References

Hensel, N. (2016). The Defense Industrial Base: Strategies for a Changing World. Routledge.

Holmström, J., Liotta, G., & Chaudhuri, A. (2017). Sustainability outcomes through direct digital manufacturing-based operational practices: A design theory approach. Journal Of Cleaner Production, 167, 951-961.

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