Carrying Costs

An accurate understanding of carrying costs is paramount to a successful supply chain optimization endeavor. However, in my personal life, I've never heard them come up in conversation. So, what are carrying costs? Carrying cost is the total cost of carrying an item in inventory. Everything you have has a carrying cost. Carrying costs are pretty simple to calculate (equation graphics provided by opsrules.com (Hou, 2013)):


First, calculate the cost of inventory per year:
   

Then, divide that figure by the inventory value:

This is, in my opinion, easier to calculate for a corporation than it is for an individual. In a corporation, you can look at the cost of your warehouse, tools used in that warehouse, cost of storage solutions, cost of expansion if you run out of space, and so on. Also, you have an accurate tally of inventory book value.

For an individual, your home may be your warehouse and odds are pretty good that you don't use an inventory management program to keep track of your possessions' NBV (net book value). With this in mind, how do you use carrying costs in your personal life?

There are a few items (cars, ATVs, kayaks, RVs, etc) that carry a significant NBV and require significant storage solutions that would benefit from an actual carrying cost analysis, but for most things, you don't need to pin down your exact carrying costs for decision-making. For example, say you are considering a move to a more expensive home. It is important to evaluate the impetus behind that move. Are you moving to a safer neighborhood with better schools for your kids? Carrying costs probably aren't relevant to that decision. On the other hand, are you moving because you've run out of room in your two-car garage and you want to move to a home with a three-car and a shop? This is when carrying costs should be considered.

Here's what it ultimately boils down to: do you add value to your family and/or quality of life by increasing carrying costs? Is the value added by the purchase of a boat overshadowed by the value lost in the need for more extensive storage solutions? As stated earlier, these are easy questions to answer for a corporation, whose legal obligation is to increase wealth for shareholders. For an individual, those decisions impact myriad things. Therefore, I am in no way suggesting that there is a formula for making these decisions, nor am I making recommendations for how you spend your money. I am simply offering some things to think about to help make a more informed decision.

This topic is, in my opinion, the most abstract when applied to individuals. That is one reason why I chose to cover it first. The other is that the next five segments will include more practical solutions, but they all must be framed in the context of carrying costs to achieve the highest efficacy. My aim is to keep these installments succinct, so this post may not seem to address your personal situation. As such, I encourage you to reach out to me if you have any questions or would like a little clarification on anything covered. Thank you for reading; I look forward to seeing you again in two weeks!      


References:

Hou, B. (2013, September 10). Do You Know Your Inventory Carrying Costs? Retrieved September 25, 2014, from http://www.opsrules.com/supply-chain-optimization-blog/bid/314279/Do-You-Know-Your-Inventory-Carrying-Costs 

Introduction to Personal Supply Chain Management

Supply chain management is not a topic at the forefront of too many minds right now. It’s a prominent topic in major corporations, but on the local, and especially individual levels, it doesn’t quickly come up in conversation. I’m hoping to change that. Regardless of who you are or where you are (both geographically and chronologically), you have a supply chain that is used to operate your life on a daily basis. Don’t believe me?

Do you have a home? What do you use that home for? Do you have a car, a bike, or shoes? What do you use them for? Do you consume anything? What do you consume and why do you consume these things?

For some of us, we have a home to satisfy basic shelter needs. Others may have homes that are used to entertain guests or help others that are down on their luck. Some of us eat alone; others may have large parties to engage socially and fellowship. Some of us use cars to commute to work; others may use them to travel all over the place. Most of us consume television, food, fuel, cellular service, and stuff for our hobbies. Some consume materials while making arts, crafts, or even major construction projects.  

These are all great things, and I want you to continue to enjoy what you do in life and also free up some resources for your goals; be they a new house or sending money to help orphans in Uganda. With a stagnant economy, however, it may be tough to find the resources to accommodate these goals. The days of anticipating sizable raises and lofty promotions are, for most of us, just not here anymore. And why is that? Well, it’s because this same economy is just as stagnant for your employer. In the corporate world, companies are learning to shift their focus from revenue growth to diminishing operating costs through supply chain optimization.

My assertion is that you can do the same. How liberating would it be if you could allocate more of your resources to your goals (capital projects) without having to wait for a raise (revenue growth)? The same principles that apply to the corporate world can be applied to your personal life. Over the next few weeks, I’d like to help you optimize your personal supply chain. I will submit a new post every other week, starting this Saturday. Please share with your friends and subscribe to get updates. Here is a rough outline to what I’ll be covering (please email me with requests for other topics or if you’d like to ask a question):

-          Carrying costs- the costs of ownership

-          SLOB- slow moving and obsolete inventory and what to do with it

-          Inventory planning- how to forecast future demand and use that knowledge to reduce costs

-          Logistics optimization- how to reduce the cost of doing life

-          Vendor selection- considerations for choosing when and where to buy

-          Procurement- how to buy the things you need (or- let’s be honest- want)