One of the elements comprising a company's total supply-chain management costs. These costs consist of the following:

- Opportunity Cost: The opportunity cost of holding inventory. This should be based on your company's own cost of capital standards using the following formula. Calculation: Cost of Capital x Average Net Value of Inventory.

- Shrinkage: The costs associated with breakage, pilferage, and deterioration of inventories. Usually pertains to the loss of material through handling damage, theft, or neglect.

- Insurance and Taxes: The cost of insuring inventories and taxes associated with the holding of inventory.

- Total Obsolescence for Raw Material, WIP, and Finished Goods Inventory: Inventory reserves taken due to obsolescence and scrap and includes products exceeding the shelf life, i.e. spoils and is no good for use in its original purpose (do not include reserves taken for Field Service Parts).

- Channel Obsolescence: Aging allowances paid to channel partners, provisions for buy-back agreements, etc. Includes all material that goes obsolete while in a distribution channel. Usually, a distributor will demand a refund on material that goes bad (shelf life) or is no longer needed because of changing needs.

- Field Service Parts Obsolescence: Reserves taken due to obsolescence and scrap. Field Service Parts are those inventory kept at locations outside the four walls of the manufacturing plant i.e., distribution center or warehouse.