Capital Intensive parts have:
- High
purchase cost
- Long
inventory cycle times
- High
inventory cost
Examples
We stock Bulldozer belts for Caterpillar, Hitachi, Komatsu, etc.
The average purchase cost
per belt is $30,000
.
We sell them at an average sales price
of $50,000
.
Our inventory cycle time
per belt is approximately 1 year
and our cost of capital
is 12%
.
Thus our inventory cost
incurred per item is 0.12*30,000
or $3600
.
Each belt ties up on average $30,000 in capital and we incur an inventory cost
of $3600
. This is a Capital Intensive item.