Inventory is key inbusiness, as it influences a given company’s financial stability.For instance, inventory shrinkage reduces the potential profit in agiven company and may necessitate immediate changes such workforcereduction or technology advancement. This paper discusses howinventory shrinkage affects the cost of carrying inventory and thehow obsolescence contributes to the cost of carrying inventory.
Questiona: Inventory Shrinkage and Cost of Carrying Inventory
Shrinkage inventory or stolen stock contributes to the overall lossof sales and decreased employee bonuses. In addition, a businessexperiencing inventory shrinkage is forced to increase its prices inorder to realize the set profit. The cost of carrying inventoryremains fixed even with inventory reduction, which affects businessesnegatively (Federgruen& Heching, 2014). Inventory shrinkage can bereduced through increased security measures. A given business caninstall computerized devices for tracking stock theft. In addition, abusiness has to investigate its workforce to ensure it does notcontribute to the reduction of stock. The employees are quitefamiliar with various outlets in business and can greatly impact oninventories if not controlled. Moreover, a business can reduce thenumber of inventory handled in a given time. Limited inventories areeasy to monitor and manage.
Question b: Obsolescence and the cost of Carrying Inventory
Obsolescencecost is witnessed in businesses that produce competitive products. Asan inventory stays longer in a given business, other businessesstrive to employ new technologies and businesses that lag behindexperience obsolescence as their inventories become outdated(Federgruen &Heching, 2014). As new technologies involve extra cost,they lower the value and costs of the older technologies.
Obsolescencecan be reduced by always producing smaller quantities. By producingsmall quantities, a given business is able to evaluate the currentchanges in the market and adopt the current technologies withoutundergoing high cost of carrying inventory.
Federgruen,A., & Heching, A. (2014). Combined pricing and inventory controlunder uncertainty. OperationsResearch, 47(3),454-475.