How to Calculate Total Inventory Cost

Total Inventory Cost Formula:

\[ TIC = (Average Inventory × Holding Cost \%) + Ordering Costs + Shortage Costs \]

Average Inventory:

currency

Holding Cost %:

Ordering Costs:

currency/order

Shortage Costs:

currency/unit

Total Inventory Cost (TIC):

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1. What is Total Inventory Cost?

Total Inventory Cost (TIC) represents the sum of all costs associated with maintaining and managing inventory in a business. It includes holding costs, ordering costs, and shortage costs, providing a comprehensive view of inventory management efficiency.

2. How Does the Calculator Work?

The calculator uses the TIC formula:

\[ TIC = (Average Inventory × Holding Cost \%) + Ordering Costs + Shortage Costs \]

Where:

\( Average Inventory \) — Average stock value in currency
\( Holding Cost \% \) — Annual percentage of inventory value for holding costs
\( Ordering Costs \) — Cost per order placed
\( Shortage Costs \) — Cost per unit short or out of stock

Explanation: This formula helps businesses understand the complete cost picture of their inventory management strategy, enabling better decision-making for inventory optimization.

3. Importance of TIC Calculation

Details: Calculating Total Inventory Cost is crucial for identifying cost-saving opportunities, optimizing inventory levels, improving cash flow management, and enhancing overall supply chain efficiency.

4. Using the Calculator

Tips: Enter average inventory value in currency, holding cost as a percentage, ordering costs per order, and shortage costs per unit. All values must be non-negative numbers.

5. Frequently Asked Questions (FAQ)

Q1: What are typical holding cost percentages?
A: Holding costs typically range from 15-30% of inventory value annually, including storage, insurance, obsolescence, and capital costs.

Q2: How do I calculate average inventory?
A: Average inventory is typically calculated as (Beginning Inventory + Ending Inventory) ÷ 2 over a specific period.

Q3: What factors affect ordering costs?
A: Ordering costs include purchase order processing, transportation, receiving, inspection, and administrative expenses per order.

Q4: How can I reduce total inventory costs?
A: Strategies include optimizing order quantities, improving demand forecasting, implementing just-in-time inventory, and negotiating better supplier terms.

Q5: What's the relationship between TIC and EOQ?
A: TIC is a key component in Economic Order Quantity (EOQ) calculations, helping determine the optimal order quantity that minimizes total inventory costs.