In marketing, carrying cost refers to the total cost of holding inventory. This includes warehousing costs such as rent, utilities and salaries, financial costs such as opportunity cost

Opportunity cost

Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...

, and inventory costs related to perishibility, shrinkage and insurance.

When there are no transaction costs for shipment, carrying costs are minimized when no excess inventory is held at all, as in a Just In Time production system.

Excess inventory can be held for one of three reasons. Cycle stock is held based on the re-order point, and defines the inventory that must be held for production, sale or consumption during the time between re-order and delivery. Safety stock

Safety stock

Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans...

 is held to account for variability, either upstream in supplier lead time, or downstream in customer demand. Psychic stock is held by consumer retailers to provide consumers with a perception of plenty.