Inventory carrying cost per $1,000 revenue

This measure calculates the amount (per $1,000 revenue) of opportunity cost/cost of capital (for the money tied up in inventory value), storage space cost, insurance, taxes, handling/administration of inventory, shrinkage, and total obsolescence of all products' inventories. It is part of a set of Cost Effectiveness measures that help companies understand all cost expenditures related to the process "plan for and align supply chain resources."

Benchmark Data

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Measure Category:
Cost Effectiveness
Measure ID:
100788
Total Sample Size:
760 All Companies
Performers:
25th
- Median
- 75th
-
Key Performance
Indicator:
Yes

Compute this Measure

Units for this measure are dollars.

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Value of inventory carrying costs / (Total business entity revenue * 0.0010)

Key Terms

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Total Annual Revenue/Net Revenue

Total annual revenue is net proceeds generated from the sale of products or services. This should reflect the selling price less any allowances such as quantity, discounts, rebates and returns. If your business entity is a support unit and therefore does not directly generate revenue, then provide the revenue amount for the units you support. For government/non-profit organizations, please use your non-pass-through budget. For insurance companies the total annual revenue is the total amount of direct written premiums, excluding net investment income. Note: Business entity revenue needs to only include inter-company business segment revenue when the transactions between those business segments are intended to reflect an arm's length transfer price and would therefore meet the regulatory requirements for external revenue reporting.

Cost Effectiveness

Cost effectiveness measures are those in which two related variables, one of which is the cost and one of which is the related outcome related to the expenditure are used to determine a particular metric value.

Median

The metric value which represents the 50th percentile of a peer group. This could also be communicated as the metric value where half of the peer group sample shows lower performance than the expressed metric value or half of the peer group sample shows higher performance than the expressed metric value.

Measure Scope

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Cross Industry (7.3.0)

  • 4.1.1 - Develop production and materials strategies (10221) - Creating strategies for production processes, as well as the process of managing materials. Define production and supply constraints. Design a blueprint of the workplace. Establish rules and regulations regarding the employees, outsourcing of services, and the expenditure to be incurred on the manufacturing capital.
    • 4.1.1.1 - Define manufacturing goals (10229) - Creating quantifiable strategic objectives for each manufacturing segment in conjunction with sales projections.
    • 4.1.1.2 - Define labor and materials policies (10230) - Setting up internal rules and regulations regarding the employees and the materials.
    • 4.1.1.3 - Define outsourcing policies (10231) - Creating rules and regulations regarding contracting out of a business process to another party in order to reduce costs.
    • 4.1.1.4 - Define capital expense policies (10232) - Designing rules and regulations pertaining to the expenditure incurred in acquiring or upgrading the existing stock of manufacturing capital.
    • 4.1.1.5 - Define capacities (10233) - Outlining the manufacturing and processing capacities of the organization. Delineate the capabilities required for optimizing output with available resources. Analyze capabilities possessed by the organization concerning the raw materials required and the process necessitated for producing finished products.
    • 4.1.1.6 - Define production network and supply constraints (10234) - Defining limitations in the ability of the organization's supply chain to deliver a new stock, and creating a network of production stakeholders. Frame and manage relationships within the flow of manufacturing and processing operations. Identify probable supply issues.
    • 4.1.1.7 - Define production process (14193) - Outlining the scheme of processing inventory into finished products/services. This includes the use of raw materials, machinery, skill sets, and knowledge to create new offerings.
    • 4.1.1.8 - Define standard operating procedures (19551) - Establishing or prescribing methods to be followed routinely for the performance of designated operations or in designated situations. This may include step-by-step instructions to help workers carry out complex routine operations. The goal is to improve efficiency, quality, and uniformity of performance, while reducing miscommunication, failure, or rework.
    • 4.1.1.9 - Define production workplace layout and infrastructure (14194) - Determining the floor plans for the processing facility that is meant for delivering finished products/services. Identify the totality of infrastructure needed for using this space in the manufacturing process, including machinery, factory floors, offices, and furniture.
  • 4.1.2 - Manage demand for products (10222) - Forecasting demand for products using secondary research and customer feedback. Refine these forecasts. Inspect the approach used in creating forecasts, and determine its accuracy.
    • 4.1.2.1 - Develop baseline demand forecasts (10235) - Identify the bedrock levels of market demand anticipated for the organization's products/services. Estimate future demand for product and services using historical data, analysis of the market environment and any externalities, etc. to create ex ante approximations.
    • 4.1.2.2 - Collaborate demand with customers (10236) - Working closely with the organization's customers to understand their drives and behavior, with the objective of estimating future demand. Reach out to customers through various means to understand their behavior patterns, usage elasticity, and degree of variability--and ultimately determine demand for each offering.
    • 4.1.2.3 - Develop demand consensus forecast (10237) - Arriving at a consensus over the forecasted levels of demand for products/services. Consensus is achieved by juxtaposing decisions developed in the baseline forecast with those reached at by collaborating with customers. Enlist senior-level decision makers of the sales and marketing functions.
    • 4.1.2.4 - Determine available to promise (10238) - Identify the volume of products/services that may be committed for delivery to fulfill sales. Figure out the amount of stock available. Forecast its volumes.
    • 4.1.2.5 - Monitor activity against demand forecast and revise forecast (10239) - Picking out any activity that deviates from the forecast, and adjusting it. Closely track and study the levels of demand as they emerge. Refine the consensus forecast as needed.
    • 4.1.2.6 - Evaluate and revise demand forecasting approach (10240) - Examining the methodology used to estimate future demand. Refine it in light of current market realities and demand.
    • 4.1.2.7 - Measure demand forecast accuracy (10241) - Calculating and inspecting the accuracy of demand forecasts. Use metrics to check the reliability of the forecasts created.
  • 4.1.3 - Create materials plan (10223) - Developing a scheme that allows for advance planning for the availability of raw materials and spares. Start with an unconstrained plan, and refine based on supply chain realities by identifying critical materials required for production, checking material specifications, and collaborating with all vendors over the supply.
    • 4.1.3.1 - Create unconstrained plan (10242) - Developing a plan for raw materials and other inventory items in order to meet market demand. Ensure the availability of all inventory items such as raw materials and spares. Create a blueprint in line with Define labor and materials policies [10230].
    • 4.1.3.2 - Collaborate with supplier and contract manufacturers (10243) - Collaborating with vendors and contractual manufacturers with the objective of ensuring a continual supply of raw materials and spares. Leverage long-term connections/relationships with various suppliers, and cultivate new ones. Track the activities of all vendors. Receive regular updates to prepare for any fluctuations in supply.
    • 4.1.3.3 - Identify critical materials and supplier capacity (10244) - Identifying principal materials needed for the manufacturing process and the levels of supply that may be ensured for them. Determine the essential and crucial inventory items required for the smooth functioning of all manufacturing processes. Estimate the average, peak, and baseline capacities of various vendors and suppliers. Establish the capability of individual suppliers from the market and the vendors.
    • 4.1.3.4 - Monitor material specifications (10245) - Observing and surveying all inventory items in order to check for the veracity of their specifications. Monitor various attributes and characteristics for respective inventory items such as density, volume, and size, as well as contextualized specifications particular to the respective materials.
    • 4.1.3.5 - Generate constrained plan (10246) - Generating a bounded plan that takes stock of the actual supply chain scenario. Take stock of all information collected while creating an inventory supply plan.
    • 4.1.3.6 - Define production balance and control (14196) - Defining an equitable volume for the production of products/services that adheres to an equilibrium value, and creating a scheme of control for processing items. Create schematics for systematically planning, coordinating, and directing the manufacturing activities in line with the production balance determined.
  • 4.1.4 - Create and manage master production schedule (10224) - Taking care of the master production plan. The master production includes creation and implementation of the site-level production plan, as well as management of the inventory that is currently in the production process.
    • 4.1.4.1 - Model production network to enable simulation and optimization (20023) - Create representative logical system that provides the framework to attain strategic objectives based on resources, product volumes, and processes. Provides the general sequential flow and capacity requirement relationships among raw materials, parts, resources, finished products, and product families.
    • 4.1.4.2 - Create master production schedule (20024) - Creating the plan for internal activities such as production, inventory, and staffing. Include forecasted quantity of items to produce based on inputs from sales planning, demand planning/forecasting, and supply chain partners.
    • 4.1.4.3 - Maintain master production schedule (17041) - Supervising and overseeing the plan for internal activities such as production, inventory, and staffing. Set the quantity of items to produce each week of a short-range planning horizon.
  • 4.1.5 - Plan distribution requirements (17042) - Maintaining master data of finished products and inventory. Identify the requirements of finished products at the destination, as well as partner requirements. Calculate the consolidation at source. Manage replenishment planning. Create and administer a dispatch plan. Calculate load plans for destinations and partners. Manage the cost of supplying these products. Ensure effective utilization of capacity.
    • 4.1.5.1 - Maintain master data (10252) - Maintaining and preserving the master data plan for distribution requirements. Create a systematic collection of facts and figures regarding the distribution of the inventories. Maintain policies, processes, and tools covering the distribution function.
    • 4.1.5.2 - Determine finished goods inventory requirements at destination (10253) - Interact with the concerned person at the destination to validate the requirements and to avoid any miscommunication of information.
    • 4.1.5.3 - Determine product storage facility requirements (19555) - Evaluate constraints, needs, parameters, and conditions for physical storage and retrieval of components or products for future use or shipment in a storage facility within a certain timeframe.
    • 4.1.5.4 - Calculate requirements at destination (10254) - Interact with the concerned authority at the destination to reach a specific figure that correctly represents requirements.
    • 4.1.5.5 - Calculate consolidation at source (10255) - Determining the aggregate volume of products/services consolidated at the source. Calculate the number of finished products that are ready to be delivered to the customers, particularly at one date.
    • 4.1.5.6 - Manage collaborative replenishment planning (10256) - Administering the plan for collaborative replenishment of goods. Replenish inventory by creating a plan in case of faulty production.
    • 4.1.5.7 - Calculate and optimize destination dispatch plan (10258) - Estimating the timing and duration of the delivery of the inventory from the source to the destination. Plan the logistic details of all the distribution routes and activities.
    • 4.1.5.8 - Manage dispatch plan attainment (10259) - Accomplishing the dispatch plan. Strictly follow the schedule, and adjust for deviations. Coordinate with the concerned authorities at various destinations.
    • 4.1.5.9 - Calculate and optimize destination load plans (10260) - Evaluating the plans for delivering loads to destinations. Create a systematic plan that specifies the load plans for every single destination.
    • 4.1.5.10 - Manage partner load plan (10261) - Administering the load plan for partners. Manage the delivery, and dispatch from the source to the partners.
    • 4.1.5.11 - Manage cost of supply (10262) - Managing all expenses to provide products/services in the market. Estimate the overall cost of supplying of products/inventory, including the cost distributing it through various partners and channels. Consider the cost of all the logistical processes that occur from the moment a product is ready to be dispatched to the time it reaches the destination.
    • 4.1.5.12 - Manage capacity utilization (10263) - Determining the capacity utilization of the organization's production process. Realize the extent to which an enterprise uses its installed productive capacity (i.e., the relationship between output and the potential output if capacity was fully used).
  • 4.1.6 - Establish distribution planning constraints (10226) - Instituting the constraints for planning of distribution process. Create a plan that specifies every element in the distribution process from the blueprint of the distribution centers to how and when the inventory would reach the distribution centers.
    • 4.1.6.1 - Establish distribution center layout constraints (10267) - Instituting the constraints for creating a layout for distribution center. Consider factors such as the number of customers, demand forecasting, product groups, condition of product conservation, warehousing, and transportation management.
    • 4.1.6.2 - Establish inventory management constraints (10268) - Determining any problems that might be faced while managing inventory. Identify problems and possible issues in managing the warehousing of the raw materials, spares, and other items of inventory. Take stock of inventory needs, and determine the exact quantity of the inventory needed in the near future.
    • 4.1.6.3 - Establish transportation management constraints (10269) - Identifying any potential constraints while deciding on the dispatch and delivery plan from the source to the various distribution centers. Decide how the inventory will be transported , which and how many transportation means to use, what route to take, etc.
    • 4.1.6.4 - Establish storage management constraints (19558) - Determining potential constraints for physical storage and retrieval of components or products in a storage facility within a certain timeframe. Consider factors such as the building shape, height, capacity, door locations, lift equipment, automation, etc.
  • 4.1.7 - Review distribution planning policies (10227) - Revisiting and refurbishing the policies for planning the distribution process. Asses the distribution strategies, including how the products are to be made available and sent to different distributors. Set guidelines regarding relationships between the sources and the distribution centers.
    • 4.1.7.1 - Review distribution network (10264) - Evaluating the system that defines how the products/inventory would reach from the source (i.e., manufacturer) to the destination (i.e., retailer/distributer).
    • 4.1.7.2 - Establish sourcing relationships (10265) - Establishing relationships with transportation/distribution sources in order to ensure an effective distribution network and strategy. Screen and evaluate various sources available to pick out the best among them.
    • 4.1.7.3 - Establish dynamic deployment policies (10266) - Creating strategic guidelines on the availability of the products at all the distribution centers. Create a dynamic network to ensure availability at all times, even in cases of defaults.
  • 4.1.8 - Develop quality standards and procedures (10368) - Developing standards and procedures for maintaining the quality of products/services. Establish desired quality targets. Create standardized procedures for the quality. Ensure quality specifications are effectively communicated.
    • 4.1.8.1 - Establish quality targets (10371) - Defining specific qualitative and quantitative target figures.
    • 4.1.8.2 - Develop standard testing procedures (10372) - Creating standard procedures for testing the quality of products/services. Describe the steps of key processes to help ensure consistent and quality output. Define the routine instructions for performing the quality testing activity.
    • 4.1.8.3 - Communicate quality specifications (10373) - Communicating the desired quality specifications to the manufacturing units, as well as the distribution centers, to avoid any misunderstanding or misinterpretation.