Inventory Carrying Cost
Definition
The total annual cost of holding inventory, including capital, storage, insurance, taxes, shrinkage, and obsolescence, usually expressed as a percentage of average inventory value. Typical rates run 15 to 30 percent per year.
In Practice
Carrying cost aggregates everything it costs to own a dollar of stock for a year. The capital component, the return that money could earn elsewhere, is usually the largest, followed by warehousing space and labor, insurance and taxes, and risk costs such as shrinkage, damage, and obsolescence.
For planners, the carrying cost rate is the exchange rate between inventory and money. It converts an extra two weeks of stock into a dollar figure a CFO understands, and it feeds directly into EOQ, safety stock trade-offs, and network decisions. Using an honest rate matters: teams that assume 10 percent when the true rate is 25 percent systematically over-buy.
Example: a company holding 8 million dollars of average inventory at a 22 percent carrying rate spends about 1.76 million dollars a year just owning stock. A project that cuts average inventory by 1 million dollars is therefore worth roughly 220,000 dollars annually.
Related Calculators
Related Terms
The cost of storing one unit of inventory for a defined period, commonly expressed in dollars per unit per year. It is the per-unit form of inventory carrying cost used in lot-sizing formulas.
Economic Order QuantityThe order size that minimizes the combined cost of ordering and holding inventory. EOQ balances the fixed cost of placing orders against the cost of carrying stock.
Inventory TurnoverA ratio measuring how many times inventory is sold and replaced over a period, typically a year. It is calculated as cost of goods sold divided by average inventory value.
Excess InventoryStock held above what is needed to meet forecast demand plus planned buffers over a defined horizon. It is inventory that current plans cannot justify, even if the item itself still sells.