This is the cost a business incurs over a certain period of time, to hold and store its inventory. Businesses use this figure to help them determine how much profit can be made on current inventory. It also helps them find out if there is a need to produce more or less, in order to keep up with expenses or maintain the same income stream. Carrying cost of inventory is often described as a percentage of the inventory value.
This percentage could include taxes, employee costs, depreciation, insurance, cost to keep items in storage, opportunity cost, cost of insuring and replacing items, and cost of capital that help produce income for a business. There are four main components to the carrying cost of inventory; capital cost, storage space cost, inventory service cost, and inventory risk cost. Technology research firm Gartner is always coming up with innovative ways to compare companies and publish their relative ranks in terms of one criteria or another.
Last week, Gartner published the results of its 2012 Supply Chain Top 25, and Apple was at the top of the list. On a scale of 1 to 10, Apple pulled in a composite score of 9. 69, about 80 percent higher than second-place company Amazon and a full 436 percent higher than #24 HP. That score is based on a number of factors, including the opinion of corporate peers and Gartner analysts, the weighted three-year return on assets, and inventory turns. That last figure is a measure of how quickly a company can turn over its inventory. For Apple, that number comes out to 74. times per year — essentially once about every five days. The only company that bests Apple in inventory turns is McDonalds, not surprising when you consider that the company has to work with perishable food items. Apple’s inventory turn figure indicates that every item in your local Apple Store, for example, stays there no longer than about five days before being sold. Why is this number important? By reducing inventory holding costs and moving product more quickly from manufacturing to consumers, Apple is able to keep costs low and margins high, all of which contributes directly to the bottom line.