Carrying cost

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 (theft) and insurance. Holding cost also includes the opportunity cost of reduced responsiveness to customers' changing requirements, slowed introduction of improved items, and the inventory's value and direct expenses, since that money could be used for other purposes.

When there are no transaction costs for shipment, carrying costs are minimized when no excess inventory is held at all, as in a Just In Time production system.

Excess inventory can be held for one of three reasons. Cycle stock is held based on the re-order point, and defines the inventory that must be held for production, sale or consumption during the time between re-order and delivery. is held to account for variability, either upstream in supplier lead time, or downstream in customer demand. Psychic stock is held by consumer retailers to provide consumers with a perception of plenty.

The cost consist of four different factors:

Moreover, the carrying cost will mostly appear as a percentage number. It provides an idea of how long the inventory could be hold before the company making a lost, this also tells the manager: how much to order.

Inventory is a property of a company that is ready for them to sale. There are five basic reasons that why a company need inventory.

1.Safety inventory

This would act like a buffer to make sure that the company would have excess products for sale if consumer demands exceed their expectation."

2.Cater to Cyclical and Seasonal Demand

These kind of inventory are use for predicable events that would cause a change in people’s demand. For example, candy companies can starts to produce extra sweets that have long duration period. Build up seasonal inventory gradually to match people’s sharply increasing demand before Halloween. "

3.Cycle inventory

First of all, we need to go through the idea of economic order quantity (EOQ). EOQ is an attempt to balance inventory holding or carrying costs with the costs incurred from ordering or setting up machinery. The total cost will minimized when the ordering cost and the carrying cost equal to each other. While customer order a significant quantities of products, cycle inventory would be able to save cost and act as a buffer for the company to purchase more supplies."

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