Risk Costs

Click on the Photo to Learn More About Item Level Inventory!

​  One element of holding costs is risk.  Risk costs are the risk that is assumed when inventory is acquired.  In addition to this risk costs refer to loss of inventory value.  This is often referred to as the shrinkage that occurs within inventory.

Click Here to Subscribe to Our YouTube Channel.

What is Inventory Shrinkage?
  Inventory shrinkage occurs when actual inventory levels are less than what is recorded. In general, this means something has gone wrong.  Formally defined, inventory shrinkage is the depletion of the actual quantities of inventory that is on hand, in process or in transit.  This may be caused by regular reductions, scrap, deterioration or even theft. 
How is Inventory Shrinkage Calculated? 

Click on the Picture to Learn More About Item Level Inventory!

1. Inventory shrinkage is calculated by subtracting the actual inventory from the recorded inventory.
2. Next you divide your answer by the recorded inventory. 
3. Then you multiply the answer by 100 to convert your answer to a percentage. 

This percentage can be used to have an understanding of the shrinkage that may occur within your inventory. 
Other Risk Costs
  In addition to shrinkage, risk costs of inventory also include any costs that a company incurs to manage the risks of inventory.  Expenses like warehouse security, insurance and bars on windows or locks are some examples of inventory risk costs.  You now know what Risk Costs are with relation to inventory. 
Challenge

• Now let’s challenge your mind a bit.  You learned how to calculate inventory shrinkage.  With this in mind let's assume that the actual amount of inventory on hand is $100 dollars, however your recorded inventory is $150 dollars.  What would your inventory shrinkage percentage be?  Share your thoughts in the comments section below and receive a coupon to one of Lean Strategies International LLC's courses.

Learn More About Item Level Inventory Here!