Inventory holding cost is the sum of the cost of capital and the variable costs of keeping items on hand, such as storage and handling, taxes, insurance, and shrinkage.
Cost of Capital is the opportunity cost of investing in an asset relative to the expected return on assets of similar risk.
Storage and Handling arise from moving in and out of a storage facility plus the rental cost and/or opportunity cost of that space.
Taxes, Insurance, and Shrinkage: More taxes are paid and insurance costs are higher if end-of-the-year inventories are high. Shrinkage comes from theft, obsolescence and deterioration.