Definition
Carrying cost (also called holding cost) is the total cost of holding inventory in stock for one period, typically expressed as a percentage of average inventory value per year. It includes: capital cost (the opportunity cost of money tied up in inventory, typically 8–12%), warehousing cost (rent, utilities, labor for 3–5%), obsolescence and shrinkage (4–8%), insurance and taxes (1–2%), and handling costs (2–4%). Total carrying cost for US distributors averages 20–30% of inventory value per year (CSCMP). This means $1 million of inventory costs $200,000–$300,000 per year to hold, even without selling a unit.
Why It Matters
Carrying cost is the financial justification for every inventory optimization initiative. Reducing average inventory by $500,000 at a 25% carrying rate saves $125,000 per year in direct costs. Most distributors underestimate carrying cost because they only count warehouse rent — ignoring capital cost, obsolescence, and shrinkage makes the case for lean inventory look weaker than it actually is. Inventory Optimization Tool →
Frequently Asked Questions
What is included in inventory carrying cost?
Inventory carrying cost includes: capital/opportunity cost (8–12%), warehousing and storage (3–5%), obsolescence and shrinkage (4–8%), insurance and taxes (1–2%), and handling/administrative costs (2–4%). Total typically ranges 20–30% of average inventory value per year.
How do you calculate carrying cost of inventory?
Carrying cost = average inventory value × carrying cost rate. Example: $2,000,000 average inventory × 25% carrying rate = $500,000/year in holding costs. The carrying rate is the sum of all cost components as percentages of inventory value.
What is a good carrying cost percentage?
Industry benchmarks place total carrying cost at 20–30% for most US distributors. Best-in-class distributors minimize capital-intensive inventory positions, achieving carrying costs toward the lower end through vendor-managed inventory, consignment programs, and tighter safety stock calibration.