Business – 4.2 Inventory management – Managing inventory | e-Consult
4.2 Inventory management – Managing inventory (1 questions)
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The costs of holding inventory can be grouped into three main categories:
- Carrying (or holding) costs: expenses incurred for storing inventory, such as warehousing, insurance, and the opportunity cost of capital. Example: paying 10% per year on the value of stock as financing cost.
- Stock‑out (or shortage) costs: costs that arise when inventory is insufficient to meet demand, leading to lost sales or production delays. Example: lost profit from a customer who turns to a competitor.
- Ordering (or set‑up) costs: costs incurred each time an order is placed, including administrative work and transport. Example: the cost of processing a purchase order.