Holding cost
In one sentenceWhat it costs to keep goods in inventory during the year, such as warehouse rent, insurance, damage, obsolescence and the cost of the money tied up in them.
Simply put
Goods on the shelf are not free. The cost is usually calculated as a percentage of the average inventory value for the year.
The larger the quantities you buy, the higher this cost; the less you buy, the higher the ordering cost. The balance between them is the economic order quantity.
Worked example
A sanitary ware store's average inventory during the year is 400,000 SAR, and it estimated the holding cost at 20% a year (an assumed rate for illustration).
Average inventory value400,000 SAR
Holding cost rate20%
Annual holding cost400,000 × 20% = 80,000 SAR
Formula: Average inventory value × holding cost rate
Don't confuse it with
Ordering costHolding cost rises with the size of inventory, while ordering cost rises with the number of purchases.