Which costs are significant contributors to inventory management
Following costs and its given explanation are significant contributors to inventory management decisions:
• Holding (or carrying) costs. This broad category includes the costs for storage facilities, handling, insurance, pilferage, breakage, obsolescence, depreciation, taxes, and the opportunity cost of capital.

• Set-up (or production change) costs. Making each different product involves obtaining the necessary materials, arranging specific equipment set-ups, filling out the required papers, appropriately charging time and materials, and moving out the previous stock of material.

• Ordering (order preparation) costs. These costs refer to the managerial and clerical costs to place the purchase order. Ordering costs include all the details, such as counting items and calculating order quantities. The costs associated with maintaining the system needed to track orders are also included in ordering costs. So this cost is similar to set-up cost except that it is related to a purchase order rather than a production order. Sometimes set-up cost and ordering cost are used interchangeably.

• Shortage costs. When the stock of an item is depleted, an order for that item must either wait until the stock is replenished or be cancelled. There is a trade-off between carrying stock to satisfy demand and the costs resulting from stockout. This balance is sometimes difficult to obtain, because it may not be possible to estimate lost profits, the effects of lost customers, or lateness penalties. Frequently, the assumed shortage cost is little more than a guess, although it is usually possible to specify a range of such costs.
Establishing the correct quantity to order from vendors or the size of lots submitted to the firm's productive facilities involves a search for the minimum total cost resulting from