How is the carrying charge determined and what connections can be identified with material planning methods?- A survey study of Swedish manufacturing engineering companies

Abstract

The majority of all manufacturing companies are characterized by the fact that they are holding some sort of inventory. The inventory makes up the main asset on their balance sheet and is associated with high costs. These costs can be determined by applying a carrying charge. The carrying charge is further important in inventory management as it is a component used in some order quantity determination formulas. Theory suggests the most common methods for determination of the carrying charge is by calculation, industry standards or experienced based. However, there is a lack of praxis studies concerning how companies actually do determine and apply carrying charge. Furthermore both theorists and industry experts agree that carrying charge is not determined in the most correct way. The chosen research problem is: “How is the carrying charge determined in Swedish manufacturing companies and what connections can be identified between the carrying charge and material planning methods within these companies?” The overall aspiration with this thesis is to increase the knowledge of the carrying charge in general, as well as to serve as a foundation on which further research on the topic of carrying charge can be carried out in particular. As the main research approach for this thesis, a survey study design has been chosen. Empirical data has been collected by conducting telephone interviews among 99 companies with different turnovers, selected by random sampling. The empirical results show that the carrying charge is not widely applied within Swedish manufacturing engineering companies. Most companies in the sample determine their carrying by calculation. The most frequently included component was the cost of capital. The most common material planning methods among the sample are order based material planning and re-ordering point system. Even though theory suggests connections between the carrying charge and material planning methods, the survey shows that few companies make use of these connections. Recommended for further research studies on the topic of the carrying charge is to apply a qualitative approach in order to gain a deeper knowledge or to include other components in the carrying charge such as the environment.