stockholding costs

stockholding (inventory) costs

the cost to firms of holding STOCKS of finished products and raw materials in order to provide immediate customer service or to prevent disruptions to production caused by lack of materials. Stockholding costs include costs of warehouse space, insurance, deterioration and obsolescence of stored items and interest on capital tied up in stocks. Such costs are roughly proportional to the value of the stock held, and to contain such costs stock levels need to be kept low.

On the other hand, firms also have costs for ordering and delivering goods for stock, such as communicating with suppliers, accounting transactions, transport and unloading and inspecting goods. Many of these ordering and delivery costs will remain the same irrespective of the size of the order.

Since many order and delivery costs are fixed costs, in order to reduce these costs the firm should place large orders at infrequent intervals, and such a policy would have the additional benefit of allowing the firm to earn price discounts for bulk purchase. However, if orders are placed at infrequent intervals then stocks, and thus stockholding costs, will be high. It is desirable to strike a balance between these two groups of costs by determining the economic or optimum order quantity, which minimizes total stock cost, and adopting appropriate STOCK CONTROL procedures to maintain stocks at this level.


Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Among the benefits delivered by the company's PIKE digital printer are reductions of lead-times by up to 50 per cent, reduced stockholding costs, faster time-to-market, and improved print quality, including the ability to print micro patterns, broadening the scope for new designs.
predetermined policy </pre> <p>ensures that stockholding costs (the cost of finance; storage; insurance; handling; obsolescence; pilferage) are minimised
The DP27 has a hi-tech, variable rate, pressure control spring, simplifying ordering and cutting spares stockholding costs. Just one version of the spring enables the DP27 valve to cover downstream operating pressures from 0.2 to 17 bar g.
Spirax Sarco pilot operated reducing valves have been upgraded with the introduction of a hi-tech, variable rate, pressure control spring, simplifying ordering and cutting spares stockholding costs. Just one version of the DP17 valve covers downstream operating from 0.2 to 17bar g, rather than the three variants previously required.
Based on Oracle's exchange technology software, Lean Chain uses a unique Web-enabled transaction platform, linked to a supply-chain exchange model that is driven by end-user "pull" rather than manufacturer "push." Its core offering delivers optimized inventory management by cutting stockholding costs, reducing overhead costs, minimizing obsolete stock, and improving cash flow.