Cost to Store: An important factor to evaluate margin on the product- A case related to the retail industry

Abstract

With increasing visibility and complexity in supply chain resulted in high-velocity operations which will lead the best practices in supply chain management. Various business process integration is the heart of supply chain management. As we know that there are 3 key issues that every business has, Maximum customer service, limiting inventory investment and Maintaining high operating efficiencies. It is important to keep dynamic balancing among the above 3 issues. When we see this issues in the context of the retail industry, the company wants to increase the variety in the stores to get the high customer service but high variety leads into higher inventory level in the warehouse and more capital investment in the inventory will reduce the margin on the product by spending more money on holding. Simultaneously high variety increase the production complexity and reduce the efficiency which resulted in the high cost of goods sold and low margin. By maintaining the dynamic balancing between the company of this issue can reduce its cost of goods sold and increase margin or give a discount to stay price competitive in the market.

In any retail industry, Major part of the cost of goods sold is churned by the inventory holding cost. (Cost to store). Generally, it is assumed to be 15% to 20% of the product cost without any calculation. But for increasing market competitiveness a firm should have to keep their eye on the inventory holding cost of each SKU.

The objective of this paper is to prepare total cost to store model by finding cost components of inventory holding. where the manufacturing cost per unit is defined but due to sales variability, Cost of holding is different, so, with the example of a retail industry where lot size is not same in supply as well as demand-side and inventory carrying days are also different for each SKUs (depends on the sales trend), The methodology for calculating carrying cost is defined.