Lead time – t: The time gap between placing of order and arrival of goods at the inventory is the Lead time
Holding cost – C1: It is the cost associated with carrying or holding the goods in stock until the goods are sold or used. It includes rent for space, interest on capital, maintenance of records, taxes, insurance etc.
Setup cost – C3: It is the cost of setting up the machines for production or the cost of 4 placing the order for the goods. It includes labour cost, transportation cost etc. It is also called as Ordering cost.
Shortage cost – C2: The cost associated with delay or inability to meet the demand, because of shortage of Stock is called shortage cost Or penalty cost..