What is one example of an intangible cost related to inventory?

Opportunity cost serves as a key example of an intangible cost related to inventory. This type of cost does not manifest as a direct out-of-pocket expense, but rather as a potential loss of income or benefit that could occur when resources are tied up in inventory instead of being allocated elsewhere. For instance, if capital is invested in holding excess inventory, that money cannot be used to invest in other opportunities that might offer a high return, such as marketing initiatives or product development.

Understanding opportunity costs is crucial for effective inventory management, as companies must weigh the benefits of holding inventory against what they forgo by not utilizing their capital in other potentially profitable ventures. This consideration brings to light the strategic decision-making involved in inventory management, making opportunity cost a vital factor in evaluating overall supply chain efficiency.