A:

A company can control its holding costs through efficient management of its inventory and the efficiency of its overall logistics and costs related with those logistics. Holding costs are defined as the costs incurred by a company while holding its excess inventory in storage or warehouse and maintaining the condition of that inventory. For a company to control its overall holding costs, it needs to control the following: warehouse and logistical costs, insurance costs, spoilage or loss of inventory, inventory write-offs, materials handling costs, depreciation costs and any opportunity costs related to the capital tied up in holding costs or inventory costs.

If a company can do a good job of having the right amount of inventory on hand and no excess inventory, then all of the costs associated with inventory holding costs are reduced. Specific inventory strategies such as the just in time (JIT) inventory strategy pioneered by Toyota are great examples of strategies that reduce inventory on hand and therefore the associated holding costs.

By managing its inventory on hand efficiently, a business also reduces the amount of inventory write-offs, depreciation costs of inventory sitting in a warehouse and any losses of inventory. If a company needs a high amount of inventory on hand, it can first control holding costs by negotiating favorable rental rates with warehouses or perhaps purchasing and capitalizing its own warehouses. This greatly reduces the logistical costs of moving inventory from the warehouse to the point of sale. Obtaining favorable insurance rates is also a way a company can control its holding costs.

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