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Ian

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3

Inventory Costs: how to segment?

Hi there,

These are some of the costs typically related to inventory in a manufacturing company:
- Rent
- Labour (moving in, moving out, sorting)
- Transport (potentially)
- Capex
- Utilities
- Obsolence
- Stolen objects
- NWC-related costs

I have two questions, since I was asked something similar in a case:

1) How would you segment them? --> What are variable and fixed costs in this case? --> What are direct and indirect costs in this case? 2) Specifically, how would you categorize 'obsolence' and 'stolen objects'?

Thank you very much for your support!

Anonymous

Hi there,

These are some of the costs typically related to inventory in a manufacturing company:
- Rent
- Labour (moving in, moving out, sorting)
- Transport (potentially)
- Capex
- Utilities
- Obsolence
- Stolen objects
- NWC-related costs

I have two questions, since I was asked something similar in a case:

1) How would you segment them? --> What are variable and fixed costs in this case? --> What are direct and indirect costs in this case? 2) Specifically, how would you categorize 'obsolence' and 'stolen objects'?

Thank you very much for your support!

Anonymous

3 answers

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Hi there,

I'm going to provide you with FC vs VC segmentation, because this is the classic form.

But, remember, this isn't the end all be all! If the case is about addressing these with a combination of technology and process improvements, I might segment across tech-dependent and process-dependent.

FC

  • Rent
  • Labour (salaried employees)
  • Transport (if we own the trucks, etc.)
  • Capex
  • Utilities (for the office, warehouse, etc.)
  • Cbsolescence (wrong word...this is amortization/depreciation)
  • Stolen objects (but shocked you heard this in a case)

VC

  • Labour (hourly employees)
  • Transport (if we pay a company per load)
  • Fuel/truckers (if we own our own trucks etc. for transport)
  • Utilities (if you need more energy to make more widgets)
  • Raw Materials (why wasn't this included? Big one to miss)

As you can see, it's not always black and white! Always always always understand 1) The industry context and 2) The case prompt/objective

Hi there,

I'm going to provide you with FC vs VC segmentation, because this is the classic form.

But, remember, this isn't the end all be all! If the case is about addressing these with a combination of technology and process improvements, I might segment across tech-dependent and process-dependent.

FC

  • Rent
  • Labour (salaried employees)
  • Transport (if we own the trucks, etc.)
  • Capex
  • Utilities (for the office, warehouse, etc.)
  • Cbsolescence (wrong word...this is amortization/depreciation)
  • Stolen objects (but shocked you heard this in a case)

VC

  • Labour (hourly employees)
  • Transport (if we pay a company per load)
  • Fuel/truckers (if we own our own trucks etc. for transport)
  • Utilities (if you need more energy to make more widgets)
  • Raw Materials (why wasn't this included? Big one to miss)

As you can see, it's not always black and white! Always always always understand 1) The industry context and 2) The case prompt/objective

(edited)

Hi Ian, thank you for useful comment. I have one additional question regarding obsolescence (i.e. the fact that older artifacts may lose a bit of their value - not amortization/depreciation, maybe I didn't explain it correctly) and stolen objects. Since these costs depend on how many units (Q) we produce, shouldn't they be VC and not FC? Thank you in advance! — Anonymous A on May 22, 2020

Hi there, glad it helped! So if obsolescence relates to your stockpile of produced products, then yes, it does fit in VC. In terms of stolen objects, well, this si debatable...are employees stealing a set amount each year, or does it depend on how many are in the storage unit? Would be worth clarifying, but it still feels like a systemic issue, i.e. fixed cost — Ian on May 23, 2020 (edited)

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Hello!

As overall advise, it´s always good to break them into buckets instead of giving directly the laundry list.

Classic ones are fixed vs. variable, etc.

Hope it helps!

Cheers,

Clara

Hello!

As overall advise, it´s always good to break them into buckets instead of giving directly the laundry list.

Classic ones are fixed vs. variable, etc.

Hope it helps!

Cheers,

Clara

Agree with Ian,

Explained it nicely.

André

Agree with Ian,

Explained it nicely.

André

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