Which costs increase when a business keeps larger inventories?

In the context of operations research, maintaining larger inventories leads to an increase in several specific holding costs. These costs must be balanced against those that decrease with larger inventory sizes—such as setup costs and shortage costs—to determine optimal stock levels.1

The costs that increase as inventory size grows include:

• Capital Investment: The interest or opportunity cost associated with the money tied up in inventory.21
• Storage and Handling: Expenses related to the physical space, facilities, and labor required to manage and store goods.21
• Insurance and Taxes: Costs incurred to protect and account for the value of stored assets.1
• Risk of Value Loss: Expenses associated with deterioration, obsolescence, and depreciation of the items.21
• Shrinkage: Losses due to theft, damage, or discrepancies between recorded and actual stock levels.2

Effective inventory control aims to minimize the total cost by finding the optimal balance between these rising holding costs and the costs that decrease with larger order quantities.1