What are costs and benefits of holding inventories?

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What are costs and benefits of holding inventories?



Answer: The benefit of higher inventory levels is the reduction in order costs associated with restocking and the reduced chances of running out of material. The costs are the carrying costs, which include the cost of space, insurance, spoilage and the opportunity cost of the capital tied up in inventory. The ECONOMIC ORDER QUANTITY is the order size that minimizes the sum of order costs plus carrying costs.

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