Inventory Costs: how to segment?

Cases fixed costs Fixed or Variable inventory Practice cases variable costs
Recent activity on May 23, 2020
3 Answers
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Anonymous A asked on May 19, 2020

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

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Ian
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updated an answer on May 23, 2020
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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

(edited)

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Anonymous A on May 22, 2020

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!

Ian on May 23, 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

(edited)

Clara
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replied on May 21, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

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

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Anonymous replied on May 22, 2020

Agree with Ian,

Explained it nicely.

André

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