Inventory Costs: how to segment?

Question

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

Answer 1

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

Answer 2

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

Answer 3

Agree with Ian,

Explained it nicely.

André