What does the term "carrying cost" encompass in inventory management?

The term "carrying cost" in inventory management refers to the total cost associated with holding inventory over a specific period. This encompasses various expenses, including storage costs (such as rent and utilities for the warehouse), insurance fees, depreciation of inventory items, taxes, and the cost of capital tied up in inventory.

By understanding that carrying costs represent the cumulative expenses of maintaining inventory, businesses can make informed decisions regarding the optimal levels of stock to hold. This helps in minimizing overall costs while ensuring sufficient inventory to meet customer demand.

Transportation and logistics costs pertain specifically to the movement of goods, while purchasing supplies is related to the initial acquisition of inventory rather than its holding costs. Similarly, costs incurred during sales transactions do not reflect the ongoing expenses associated with holding inventory, which is what carrying costs fundamentally represent.