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Inventory costs rise dramatically.

By Corinne Kator, Associate Editor

According to the 18th annual State of Logistics Report, inventory carrying costs increased more than the overall U.S. economy in 2006.

Inventory carrying costs in the United States rose a whopping 13.5% last year, far outpacing the overall U.S. economy, which grew at 6.3% including inflation. Inventory costs grew even faster than transportation costs, which rose a hefty 9.4%.

These numbers are included in the 18th annual State of Logistics Report authored by logistics consultant Rosalyn Wilson and issued last month by the Council of Supply Chain Management Professionals ( ). According to the report, overall logistics costs rose 11% to $1.31 trillion in 2006, with inventory carrying costs accounting for most of that growth.

Wilson attributes the rise in inventory costs to significantly higher interest rates and warehousing costs.

Warehousing is becoming more expensive, in part, she says, because warehouses are providing more services, such as packaging, assembly, sorting and RFID tagging.

Another reason for the rise in warehousing costs is that warehouses are simply carrying more goods. These higher inventories buffer the uncertainty inherent in today's long and complex supply chains.

'To some extent, a manufacturer or supplier in the U.S. has far less control over freight movement today than they had five or 10 years ago when there were more sources of goods and parts domestically,' says Wilson. 'To mitigate these risks, more products are being held in inventory. While this does raise costs, it is a sound business decision in today's environment.'

A shift in retail strategy is also adding to warehouse inventories. Many retailers have decided to keep lower levels of stock in their stores, pushing more goods up the supply chain into their suppliers' warehouses and DCs.

'Headlines proclaiming historically low inventories held by mega-retailers are not indicative of actual inventory reductions,' says Wilson. 'Suppliers now have to hold inventory in various segments of the supply chain to meet the just-when-we-need-it demand of retailers like Home Depot and Target.'

Clearly, retailers who are maximizing space in their stores and suppliers who are saving money through offshore manufacturing are reabsorbing at least some of those costs in their transportation and warehousing budgets. As Wilson puts it, managing logistics in today's complex global environment simply costs more.

       U.S. business inventory carrying costs ($ billions)
                                             2005  2006  % change
Interest                                     58    93    60.3%
Warehousing                                  90    101   12.2%
Taxes, obsolescene, depreciation, insurance  245   252   2.9%
Total carrying costs                         393   446   13.5%
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Article Details
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Author:Kator, Corinne
Publication:Modern Materials Handling
Article Type:Editorial
Geographic Code:1USA
Date:Jul 1, 2007
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