Fundamentals of Business

The cost of carrying stocks

The cost of carrying stocks there are three elements in the costs of carrying costs:
Administrative and financial costs:
I. Costs of placing, processing orders
II. Handling costs
III. Cost of forgoing bulk purchase discounts
IV. Cost of failing to anticipate price increases

Holding costs
I. rent for the required space;
II. equipment, materials,
III. labour to operate the space;
IV. insurance;
V. security;
VI. Interest on money invested in the inventory and space, and other direct expenses.
VII. Some stored goods become obsolete before they are sold, reducing their contribution to revenue while having no effect on their holding cost.
VIII. Some goods are damaged by handling, weather, or other mechanisms.
IX. Some goods are lost through mishandling, poor record keeping, or theft, a category euphemistically called shrinkage.

Stock out costs
I. lost revenue from being out of stock
II. lost future sales because of damaged goodwill
III. Spoilage, damage caused by hold ups in production.

Caution
Managers should resist the temptation of issuing an instruction to cut all stocks, say 15% as an economy measure, Instead they should first analyse stocks by value by ABC Analysis.