I was reading an article on supply chain management and encountered a number of inventory costs like ordering, carrying, shortage, holding, storage costs. I cannot understand the difference between holding, carrying and storage cost. Literally these costs sound the same. But the article mentions separate costs for these terms. Web searches didn't clear my confusion. Certain sites say that holding cost and carrying cost are the same. Certain says they are not the same. Kindly differentiate these costs.
According to a buddy of mine who was a faculty member in the area of purchasing / sourcing / procurement (they change their name every few years), "holding cost" and "carrying cost" are used pretty much interchangeably. They include costs to operate storage facilities, pilferage, spoilage, insurance and opportunity cost of capital tied up in inventory. He is not familiar with any formal use of "storage cost". One might speculate that it could be direct costs of storing stuff (facility operating costs, pilferage, spoilage, maybe insurance) but not including cost of capital. Maybe.
I agree that holding cost, carrying cost, and storage cost all sound like the same thing. The only thing I will add to the answer by @prubin is that often holding costs are expressed as a percentage of the value of the product. So, you might have a holding cost rate of $i=25\%$ and a product value of $c=200$, in which case the holding cost is $50$. Perhaps the article is using one of those terms (holding/carrying/storage) to refer to the rate and another to refer to the cost?
In any case, I would say that any distinction between those terms is idiosyncratic to that article. In other words, that article might define them a certain way, but other articles/books will define them in different ways, and/or use them interchangeably.
The unit of each cost shows the nature of that type of cost. With that, I mean if you look through the units, you can easily figure out whether:
- The cost is fixed (it is independent of the inventory amount of products). For instance, the cost of operating a storage facility which does not depend on whether you store one unit of product or many units.
- The cost is variable and can be calculated based on the amount of the product in your facility, for example, the cost of storing one car engine is different than that for 1000 engines. This cost can include carrying costs for instance. If your products(by nature) are affected by the length of time that you hold them on the shelf, your holding cost is a variable cost as well.
As you see, based on the assumptions that each paper has, your costs can be defined either as a fixed or variable cost interchangeably. Based on what I have mentioned(and of course based on the definitions in the paper) those costs can be defined as follow:
- Holding cost: variable cost which depends on the number of units of a product that you have in the inventory and the length of time that you keep those products on the shelf.
- Carrying cost: variable cost which depends on the number of units and the distances that each unit of product is being carried inside the storage or from supplier to the storage location.
- Storage cost: fixed cost that can include all the costs related to the opening and operating a storage center.
I hope it makes sense for you after re-investigating those costs in the paper.