What does carrying cost refer to in inventory management?

Carrying cost in inventory management refers to the costs associated with storing and maintaining inventory over a specific period. This includes expenses such as warehousing, insurance, depreciation, and opportunity costs tied to the capital that is tied up in inventory rather than being used for other investments.

Understanding this concept is crucial for businesses, as minimizing carrying costs can lead to more efficient operations and increased profitability. Companies need to balance the amount of inventory they keep on hand with the costs associated with holding that inventory, which directly impacts overall operational efficiency and financial performance.