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The carrying cost is the cost of holding an item in inventory. Carrying cost is usually calculated in periods of a year.
The trade off (or cost) of not having enough inventory (usually due to an attempt to reduce the carrying cost) is referred to as a Shortage cost. Shortage costs are often the result of poor management when trying to reduce carrying costs. Usually a manager who tries to minimize inventory on hand (which ultimately reduces carrying cost) to much becomes the victim of shortage cost. One major cause of carrying cost is attempts from management to reduce Ordering Costs; making one bulk purchase reduces transactions but results with a larger amount of inventory on hand which results in the higher carrying cost experienced by firms who try to reduce the number of transactions they make. Also, often times bulk discounts influence these bulk purchases, which also results in excess inventory and high carrying costs. |
