Three Widgets or Twelve?

Here is a very basic example of why holding excess inventory can cost you more than you realize.

Let’s say that, during the next twelve months, you anticipate selling twelve Acme-Widget TurboExterminator BCs.

You have two choices: You can order all twelve at once, and receive an additional two percent discount; or, you can order just a Small, Medium and Large, replacing them as they sell and receiving no discount.
The normal dealer cost on TurboExterminators is $250. This means that by ordering twelve at once, you save $60.
On the other hand, if you only order three to start with, you’ll have the use of $2,250 that will not be tied up in TurboExterminator inventory.

What could you do with that money?

If you can find a CD or other investment that pays at least 2.6 percent, you can make the same $60 on that $2,250 that you would have had it been tied up in TurboExterminator inventory and that inventory had all sold. (Somehow we think you can find an investment with a better return than that.)
You could spend the $2,250 advertising and promotion, and thus increase sales and profits.
You could invest the $2,250 in additional inventory, and thus be able to make additional sales.

Any of these three choices represents the opportunity cost you may forego if you choose to tie all your money up in BC inventory.