Holding Cost
Definition
The cost of storing one unit of inventory for a defined period, commonly expressed in dollars per unit per year. It is the per-unit form of inventory carrying cost used in lot-sizing formulas.
In Practice
Holding cost is the per-unit input that models like EOQ need. It is typically derived by multiplying an item's unit cost by the company's carrying cost rate: a 40 dollar item at a 25 percent annual rate costs 10 dollars per unit per year to hold. Bulky, refrigerated, hazardous, or high-theft items warrant higher item-specific rates.
Planners feel holding cost most in lot-sizing and buffer decisions. Every increase in order quantity, safety stock, or pre-build translates directly into holding cost, so getting the per-unit number roughly right keeps those trade-offs honest. Underestimating it biases the whole system toward bloated inventory.
Example: a planner comparing two pack sizes finds the bulk option saves 0.30 dollars per unit in purchase price but adds six weeks of average inventory. At 12 dollars per unit annual holding cost, the extra 1.38 dollars per unit in holding expense makes the bulk deal a clear loser.
Related Calculators
Related Terms
The total annual cost of holding inventory, including capital, storage, insurance, taxes, shrinkage, and obsolescence, usually expressed as a percentage of average inventory value. Typical rates run 15 to 30 percent per year.
Ordering CostThe fixed cost incurred each time an order is placed, independent of order size, covering activities like purchase order processing, receiving, inspection, and invoice handling. In manufacturing, the equivalent is setup cost.
Economic Order QuantityThe order size that minimizes the combined cost of ordering and holding inventory. EOQ balances the fixed cost of placing orders against the cost of carrying stock.