Abstract
We consider the problem of choosing the holding cost in inventory models. Traditionally, the cost of holding inventory is assumed to increase linearly with a rate that is equal to a percentage of the product value. This since the capital cost is believed to make up the main part of the cost. However, recent research indicates that this is not necessarily the case. In the present work, we present a more general model of the cost of holding inventory based on a microeconomic framework. A method for determining a suitable holding cost per unit and time unit, h, which can be used in existing heuristics/formulas is derived. The method is based on the ideas behind activity-based costing (ABC). The suggested method works well in the considered numerical examples (maximum and average cost increase is 1.78% resp. 0.08%). There exist situations where the traditional approach, i.e., setting h as a percentage of the product value, gives rise to a significant cost increase (>15%).
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
