Opportunity Cost
Financing inventory is always achieved through either investment or a loan from any financial institution. Interest or opportunity cost, whichever is greater, usually is the largest component of holding cost, often as high as 15 percent.
For instance, a pharmaceutical distributor may obtain a loan to finance inventory of its vendors at an annual interest rate of more then 12 percent annually or it may forgo an opportunity to invest in stocks or saving scheme at expected return rate of 11 to 13 percent annually.
Storage and Handling Costs
Inventory takes up space and it requires labor to frequently move inventory from one place to another as per demand. These costs may incur when a company or business rents space on either long term or short term basis. And up to some extent there is some kind of opportunity cost involved with a rented or leased premises to store and take care of inventory.
Taxes, Insurance and Shrinkage
High inventory levels lead to more taxes. And shrinkage takes 3 forms normally. Theft or inventory. Discounting Inventory sale values owing to business pressures. Deterioration through physical spoilage or damage results in loss of inventory or shrinkage.
Financing inventory is always achieved through either investment or a loan from any financial institution. Interest or opportunity cost, whichever is greater, usually is the largest component of holding cost, often as high as 15 percent.
For instance, a pharmaceutical distributor may obtain a loan to finance inventory of its vendors at an annual interest rate of more then 12 percent annually or it may forgo an opportunity to invest in stocks or saving scheme at expected return rate of 11 to 13 percent annually.
Storage and Handling Costs
Inventory takes up space and it requires labor to frequently move inventory from one place to another as per demand. These costs may incur when a company or business rents space on either long term or short term basis. And up to some extent there is some kind of opportunity cost involved with a rented or leased premises to store and take care of inventory.
Taxes, Insurance and Shrinkage
High inventory levels lead to more taxes. And shrinkage takes 3 forms normally. Theft or inventory. Discounting Inventory sale values owing to business pressures. Deterioration through physical spoilage or damage results in loss of inventory or shrinkage.
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