Inventory Carrying Cost Calculator
Inventory carrying cost (also called holding cost) is the total cost of storing unsold inventory. It includes storage, insurance, depreciation, opportunity cost, and more. Understanding this cost is crucial for inventory optimization.
Input Parameters
Formula
Carrying Cost = Average Inventory Value × Carrying Cost RateThe carrying cost rate typically ranges from 15-30% of inventory value per year, depending on industry and storage conditions.
Variable Definitions
Cost of Capital
Opportunity cost of money tied up in inventory (typically 8-15%).
Storage Cost
Warehouse rent, utilities, and equipment (typically 2-5%).
Service Cost
Insurance and taxes on inventory (typically 2-4%).
Inventory Risk
Obsolescence, shrinkage, and damage (typically 2-6%).
Example Calculation
Scenario: Calculate annual carrying cost: - Average Inventory Value: $500,000 - Cost of Capital: 10% - Storage: 3% - Insurance/Taxes: 2% - Obsolescence Risk: 4% Total Carrying Rate = 10% + 3% + 2% + 4% = 19% Annual Carrying Cost = $500,000 × 19% = $95,000
How to Interpret Your Result
Understanding your carrying costs: • Lower carrying costs improve cash flow and profitability • High carrying costs suggest opportunities for inventory reduction • Use carrying cost in EOQ calculations for optimal ordering • Compare carrying cost to stockout costs when setting safety stock