More economic arguments for setup reduction

In addition to the cost of acquisition, there can be significant expenses in actually being in possession of inventory, including, but not limited to:

- Borrowing costs of capital
- Cost of storage space – racking, storage bins, building space rent, lighting, heat, etc.
- Insurance
- Spoilage of inventory (e.g. obsolescence or deterioration)
- Theft, pilferage and other losses
- Damage to inventory – physical damage from lift trucks or during other handling
- Cost of handling to move or rotate
- Cost of management, measurement and accounting for inventory
- Cost of inefficiency due to inventory issues – e.g. layouts may be less than optimal in a large factory with large amounts of inventory
- Loss of business due to inventory problems – e.g. inaccuracies in inventory records that lead a business to assume that there is sufficient inventory, when there in fact is not, leading to overdue deliveries

A reasonable rule of thumb is to estimate that inventory holding costs can equal 25% to 33% of the inventory value each year.

Also considered by some is the opportunity cost – the value of other uses of the money identified above. It should be noted that opportunity cost is not a category in a financial statement.

Some estimates put the total cost of inventory as high as 50% per annum.

We have seen some of the benefits of quick setup:
- flexibility, for better customer service
- lower costs, due to less inventory

Other benefits to be explored are:
- improvement in quality
- improvement in safety
- improvement in general operations, due to need for coordination
- ability to work to customer order instead of forecast
- smaller factories improve communication
- improvement in problem solving
- ability to level loading