On the Use and Misuse of Holding Cost Models

This paper considers the relationship between holding cost and discounted cash flow models. Rather than arguing for or against one of these types of models, their close relationship is underlined by interpreting the holding cost criterion as first order approximation of the discounted cash flow criterion. Various planning models, both for dynamic operations in a finite horizon and for cyclic operations in an infinite horizon are considered. It is shown that flow-oriented modelling of the holding costs avoids misinterpretations and problems with the evaluation of inventories.