Compare holding cost · printable packet

Stock on the shelf ties up cash and costs money to keep: about half an order sits there on average, and a holding percentage of its value each year prices it; smaller orders hold less but cost more to place.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will compute the cash tied up in average stock and the yearly cost of holding it, compare two order sizes, and sort the costs of carrying stock into cash tied up, space and handling, and stock lost.

2. What you already have

A reorder point says when to order. How much to order at a time is a separate decision, and it rests on what stock costs while it waits on the shelf.

3. Words for this lesson

4. Half an order, priced

Monica buys jars of honey at 4 dollars each, 200 at a time. Right after a delivery she has 200; just before the next, almost none. On an ordinary day she has about half an order: 100 jars, worth 100 × 4 = 400 dollars. That 400 dollars is money she has already paid and cannot yet spend on anything else.

Keeping it is not free. The storage unit costs rent; boxes need moving; some jars crystallize or pass their date; and the cash itself could be paying a supplier or earning something. Monica estimates all of that at about 25 percent of the value held, each year:

$$\text{holding cost a year} = \frac{\text{order}}{2} \times \text{price} \times \frac{\text{holding percentage}}{100}$$

100 × 4 × 25 ÷ 100 = 100 dollars a year, just to keep the honey waiting. If she ordered 50 at a time instead, the average on the shelf would be 25 jars, 100 dollars' worth, costing 25 dollars a year to hold.

Term	What it means
Average stock	About half an order: stock falls from full to nearly empty.
Value on the shelf	Average stock times the price paid for each.
Holding cost	What it costs to keep stock: cash tied up, space, losses.
Holding percentage	Holding cost as a share of the value held, per year.
Ordering cost	What each order costs to place: delivery fees, time.
Bulk discount	A lower price for a bigger order.

Another way: table

Monica's honey at two order sizes.

Order size	Average on shelf	Value	Holding cost a year
200 jars	100	400	100
50 jars	25	100	25

Another way: steps

Halve the order size for the average on the shelf.
Multiply by the price for the value tied up.
Estimate the holding percentage from your own costs.
Take that percentage of the value for the yearly holding cost.
Compare order sizes, with ordering costs and discounts on the other side.

5. Both sides of the decision

The table makes smaller orders look like a free saving. They are not: each order costs something to place, such as a delivery fee or the time to count and order, and ordering four times as often costs four times as much of that. A bulk discount for big orders pulls the same way. The decision is a balance: holding cost falls as orders get smaller; ordering cost and lost discounts rise.

For a small business the useful habit is simply to know the holding side, because it is the invisible one. The delivery fee arrives as a bill; the cost of honey waiting on a shelf never does.

6. The method, step by step, and how to check it

Halve the order. That is the average on the shelf, if use is steady and orders arrive as stock runs low. Add the safety stock from the reorder lesson if it is large, since it sits on the shelf all the time.

Estimate the holding percentage. Add up a year's storage rent, handling time, spoiled or broken stock and the cost of the cash tied up, and divide by the average value held. Many small businesses land between 15 and 35 percent.

Compare. Do the same at another order size, and add the yearly ordering cost at each size: orders a year times the cost of one.

Check the answer. The average value must be about half the cost of one order. The holding cost must be smaller than the value itself unless stock spoils fast. And a smaller order must show a smaller holding cost and a larger ordering cost.

7. Why each step is allowed

Halving the order is allowed because, with steady use, stock falls in a straight line from a full order to nearly nothing, as the saw-tooth in the last lesson showed. The average of a straight fall from full to empty is half of full.

Using a percentage of value is allowed because most holding costs grow with how much stock there is: twice the stock needs twice the space, ties up twice the cash and has twice as many jars that can crystallize.

Comparing yearly costs is needed because orders and holding happen on different rhythms: holding every day, ordering every few weeks. A year puts both on the same footing.

8. Estimating the holding percentage

The holding percentage is an estimate each owner makes for their own business, and a rough one is far better than none. List the pieces for a year: storage space (rent, or the share of rent the stockroom uses), insurance on stock, time spent handling and counting, stock thrown out or sold off cheap, and what the tied-up cash costs, such as interest on a credit line or the return it could earn elsewhere.

Add them up and divide by the average value of stock held. Monica's honey: storage 40, losses 30, cash 30 dollars a year on 400 dollars held, about 25 percent. Items that spoil, break or go out of fashion have much higher percentages than items that keep.

9. Items that argue for small orders

Some stock is expensive to hold. Fresh food spoils in days. Glaze colors and clothing styles go out of fashion. Bike parts for last year's models stop selling. Fragile items break on the shelf. For these, the holding percentage is high, sometimes over half the value a year, and small, frequent orders are almost always right, even with delivery fees.

Other stock keeps well and is cheap to store: paper bags, cleaning chemicals, packaging. For these, a bulk discount can easily outweigh the holding cost, as long as there is room to store it and the cash is not needed elsewhere.

10. Space as a hidden limit

Holding cost assumes there is room for the stock. Often there is not, and space becomes the real limit before the arithmetic does. A kitchen with one walk-in cooler cannot take a month of produce, however good the price; a cleaning company with a single storage closet cannot store a year of floor cleaner.

When space is tight, its cost is not just rent. Overfull shelves slow everyone down, stock gets damaged or lost at the back, and the oldest items are not used first. Count the time spent searching and moving boxes as part of handling, and give the most space to the items used most, not the ones bought in the biggest batches.

11. First in, first out

Whatever the order size, use the oldest stock first. Put new deliveries behind or under the old, so the first jars bought are the first sold. It costs nothing and cuts losses from spoiling and dating, which lowers the holding percentage directly.

Mark delivery dates on boxes or shelf labels, so anyone restocking can see which goes forward. For food it is also a safety rule that health inspectors check; for everything else it is simply the cheapest way to make stock last, and it keeps the shelf honest about what is really there.

12. Bulk discounts, weighed properly

A supplier's offer of 5 percent off for a year's order sounds like free money. Weigh it against the holding cost of the extra stock. A year's order sits on the shelf for months: the average stock jumps, and so does the cash tied up and the risk of it spoiling or going out of date.

Work out both in dollars a year: the discount saved, and the extra holding cost of the larger average stock. Take the bulk deal only when the first is bigger. For a surf shop with a 20 percent holding cost, a 5 percent discount on a year's wetsuits loses money; for cleaning chemicals with a 10 percent holding cost, a bigger discount might win.

13. Cash tied up and the cash cycle

The cash on the shelf matters most to a business with little cash to spare. Every dollar of stock waiting to be sold is a dollar that cannot pay rent, wages or a supplier this month. The cash-flow lessons in the money course showed how a business can be profitable and still run short of cash; stock that sits too long is one of the commonest reasons.

So even where the holding percentage looks modest, a business short of cash should lean toward smaller orders. The extra delivery fees are a known, steady cost; a month without enough cash to pay the rent is not.

14. In the world: a Portland bookstore trims its backlist

An independent bookstore in Portland, Oregon, ordered most of its backlist titles in tens to get a better wholesale discount. Its stockroom was always full, and cash was always tight in the months before the holiday season.

The owner estimated the holding percentage: about 6,000 dollars a year of rent for the stockroom share, 2,000 of books returned or sold off cheap, and 1,500 of interest on the credit line that funded the stock, against an average of about 38,000 dollars of books held. Roughly 25 percent.

For slow-selling titles, a 10-copy order sat on the shelf for most of a year. The extra discount for ordering 10 instead of 3 was about 4 percent of the price; the extra holding cost was far more. She switched slow titles to orders of 2 or 3, kept bulk orders for the steady sellers, and within a year the average stock fell by about 9,000 dollars, freeing cash for the holiday buying that had always squeezed the business.

15. In the world: the economic order quantity

Operations textbooks give a formula, the economic order quantity, for the order size that balances holding cost and ordering cost exactly. It uses the same ingredients as this lesson: yearly use, the cost of placing an order and the cost of holding a unit for a year. Comparing two or three sensible order sizes, as here, usually gets a small business close enough.

16. Where this goes wrong

Stock on the shelf is money in the bank. It is money spent and not yet recovered.

Holding cost is just the storage rent. It includes cash tied up and stock lost.

17. Northside Repairs' brake cables

18. Monica's honey

19. Maya's glaze powder

20. Your turn: Neighborhood Kitchen's takeout boxes

21. Guided practice

Monica lists what her stock of honey jars costs her beyond the price. Sort each item.

22. Guided practice

Complete the worked solution: Bright Home Cleaning buys boxes of trash bags at $9$ dollars a box, $60$ boxes at a time. Holding stock costs it about $10$ percent of the value on the shelf each year. Find the average boxes on the shelf, their value, and the yearly holding cost.

23. Guided practice

Dev is deciding whether to buy a year's brake cables at once. Mark every note that describes a cost of holding them.

24. Practice

Northside Repairs buys brake cables at $6$ dollars each, $100$ at a time. Holding stock costs it about $20$ percent of the value on the shelf each year, in storage, spoilage and the cash it ties up. On average, how many dollars are tied up in brake cables on the shelf?

25. Practice

Neighborhood Kitchen buys boxes of takeout containers at $12$ dollars each, $50$ at a time. Holding stock costs it about $30$ percent of the value on the shelf each year, in storage, spoilage and the cash it ties up. What does holding boxes of takeout containers cost it a year, in dollars?

26. Practice

A surf shop in San Diego sells about $120$ wetsuits a year, bought at $60$ dollars each. It usually orders $20$ at a time. A supplier offers $5$ percent off if it buys all $120$ at once. Holding stock costs the shop $20$ percent of the value on the shelf a year. How many dollars a year worse off would the bulk order leave it? Fill in each figure on the sheet.

27. Somewhere new

Northside Repairs buys brake cables at $6$ dollars each, $100$ at a time. Holding stock costs it about $20$ percent of the value on the shelf each year, in storage, spoilage and the cash it ties up. It considers ordering $40$ at a time instead. Complete the sentence.

28. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

29. Test question

Bright Home Cleaning buys bottles of floor cleaner at $8$ dollars each, $150$ at a time. Holding stock costs it about $20$ percent of the value on the shelf each year, in storage, spoilage and the cash it ties up. Fill in the average value on the shelf and the yearly holding cost for orders of $150$ and of $30$, in dollars.

30. What you can do now

You can put a price on stock that is waiting on a shelf and weigh it against the cost of ordering more often. Tell someone why 'it's in stock, so it's an asset' misses a cost. Next: where missing stock went.

Working for the steps left to you

	Amount
Average units on the shelf
Cash tied up, dollars

	Amount
Extra holding cost, dollars
Dollars a year worse off

$10 \times 12 \times 30 \div 100 = 36$

	Cash tied up	Space and handling	Stock lost
$443$ dollars paid for jars not yet sold
Rent on the storage unit
Jars past their best-by date
An hour a week moving boxes

	Average value on the shelf	Holding cost a year
Orders of 150
Orders of 30