MGT 250 Lecture Notes - Lecture 61: Carrying Cost, Opportunity Cost, Stockout
11 Jun 2018
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• Costs of Maintaining an Inventory:
➢ Maintaining an inventory incurs 4 kinds of costs:
1. Ordering Costs:
o Not the cost of the inventory itself but the costs associated w/
ordering the inventory.
▪ Completing paperwork
▪ Manually entering data into a computer
▪ Making phone calls
▪ Getting competing bids
▪ Correcting mistakes
▪ Simply determining when & how much new inventory should be
reordered.
2. Setup Cost: cost of changing/adjusting a machine so that it can produce a
different kind of inventory.
o There are 2 kinds of setup costs:
I. Downtime: whenever a machine is not being used to process
inventory.
▪ Companies earn economic return only when machines are
actively turning raw materials into parts/parts into finished
products.
II. Lost Efficiency:
▪ Recalibrating a machine to optimal settings after a switchover
typically takes some time.
▪ It may take several days of fine-tuning before a machine finally
produces the # of high-quality parts that it’s supposed to.
o Each time a machine has to be changed to handle a different kind of
inventory, setup costs rise.
3. Holding Cost:
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