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In marketing, carrying cost, carrying cost of inventory or holding cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost , and inventory costs related to perishability, shrinkage , and insurance. [ 1 ]
Inversely, the total holding cost increases as the production quantity increases. Therefore, in order to get the optimal production quantity we need to set holding cost per year equal to ordering cost per year and solve for quantity (Q), which is the EPQ formula mentioned below.
Holding excess inventory is sub-optimal because the money spent to obtain and the cost of holding it could have been utilized better elsewhere, i.e. to the product that just ran out. The secondary goal of inventory proportionality is inventory minimization.
There is a fixed cost for each order placed, regardless of the quantity of items ordered; an order is assumed to contain only one type of inventory item. There is also a cost for each unit held in storage, commonly known as holding cost, sometimes expressed as a percentage of the purchase cost of the item. Although the EOQ formulation is ...
On the other hand, this arrangement can also lead to higher inventory holding costs because of the need for storage of the material, its tracking and handling, and the threat of inventory obsolescence. [11] Another option can be for the vendor to deliver to the customer's central warehouse or alternatively, to a third party's warehouse.
For example, $225K would be understood to mean $225,000, and $3.6K would be understood to mean $3,600. Multiple K's are not commonly used to represent larger numbers. In other words, it would look odd to use $1.2KK to represent $1,200,000. Ke – Is used as an abbreviation for Cost of Equity (COE).
The figure graphs the holding cost and ordering cost per year equations. The third line is the addition of these two equations, which generates the total inventory cost per year. The lowest (minimum) part of the total cost curve will give the economic batch quantity as illustrated in the next section.
The cost of carry or carrying charge is the cost of holding a security or a physical commodity over a period of time. The carrying charge includes insurance , storage and interest on the invested funds as well as other incidental costs.