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