When there are no transaction costs for shipment, carrying costs are minimized when no excess inventory is held at all, as in a Just In Time production system.
Excess inventory can be held for one of three reasons. Cycle Stock is held based on the re-order point, and defines the inventory that must be held for production, sale or consumption during the time between re-order and delivery. Safety Stock is held to account for variability, either upstream in supplier lead time, or downstream in customer demand. Psychic Stock is held by consumer retailers to provide consumers with a perception of plenty.