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Customer Demand and Inventory Costs

Components of Inventory Control
How much inventory should I hold? One of the principles of supply of goods to a market is that companies hold enough stock to satisfy customer demand without holding too much. So intuitively, just the right quantities of stock to satisfy demand will minimize cost. However, when dealing with thousands of stock keeping units, the art of balancing demand with supply is intricate. It becomes even more complex when multiple storage facilities are used and customer service times are short or vary, according to the critical nature of products.

The best way to understand how much stock you should have is to determine how much it costs you. As a guide, inventory costs vary from 2.4% to 16% of sales revenue. You might like to check your costs before embarking on a cost reduction exercise. In your endeavor to reduce costs, it's important to understand what are the typical costs involved.

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