Inventory costs can be categorized into three sub headings-
Ordering cost of inventory refers to the cost incurred for procuring inventory. It includes cost of purchase and the cost of inbound logistics. In order to minimise the ordering cost of inventory we make use of the concept of EOQ or Economic Order Quantity.
Carrying cost of inventory refers to the cost incurred towards inventory storage and maintenance. The inventory storage costs typically include the cost of building rental and other infrastructure maintained to preserve inventory. The inventory carrying cost is dependent upon and varies with the decision of the management to manage inventory in house or through outsourced vendors and third party service providers.
Shortage or stock out costs and cost of replenishment are the costs incurred in unusual circumstances. They usually form a very small part of the total inventory cost.