Inventory Carrying Cost
Inventory carrying cost is a major concern for all types of businesses that carry inventory including manufacturers, wholesalers, distributors, and retailers. These costs relate to storage costs of goods at different stages and locations from warehouse shelves to loss of value due to depreciation and vary depending on how your business is run. Naturally, if you drop ship product, you do not incur storage costs.
Inventory carrying cost is also referred to as the holding cost and is often expressed as a percentage of the total inventory amount. Because inventory carrying costs can account for up to one-third of total inventory cost, keeping careful track and control of them is vital to staying profitable. If demand decreases, you can end up with overages which lead to additional storage costs, obsolescence and occasionally breakage.
Some examples of inventory carrying costs include:
- Warehouse storage
- Taxes
- Insurance
- Labor
- Shipping
- Item Replacement
- Breakage
| The main components of inventory carrying cost include: |
| 1. Storage Costs: Costs associated with storing inventory, such as rent, utilities, and maintenance. |
| 2. Insurance Costs: Costs associated with insuring inventory against damage, theft, or loss. |
| 3. Obsolescence Costs: Costs associated with inventory becoming outdated or unsellable. |
| 4. Financing Costs: Costs associated with borrowing money to finance inventory, such as interest and fees. |
| 5. Opportunity Costs: Costs associated with not using the capital tied up in inventory for other purposes, such as investing in new products or marketing initiatives. |
How to Calculate Inventory Carrying Cost:
(Cost of holding inventory / Total Inventory value) x 100%
The longer products sit on your shelves, the more costs they accumulate. If you find yourself discounting product to move it off your shelves, you’re probably overstocked. While normal to deal with this problem from time to time, if it’s happening too often, you’ll see an increase in your carrying cost.
Excessive inventory costs eat up money that could be invested elsewhere in your business. If you want to add staff or replace equipment, you need to lower inventory costs to free up cash.
How can you lower inventory costs?
If you regularly run and evaluate reports, you know what your normal expenses are. If you suddenly see increases in a particular area, the change merits more investigation.
Your goal is to keep enough on hand without missing sales due to a shortage. Regularly recalculating your reorder point to align with demand will calibrate your purchase order quantities and/or frequency to prevent inventory overages. You can determine a minimum order quantity for each product to automate the reordering process and prevent unwanted quantity fluctuations.
SOS Inventory gives you the powerful tools you need to analyze historical sales data, breakdowns of costs for each product, and all the costs associated with a product from the time it is received through customer delivery.
Get better control over your inventory carrying costs while improving data accuracy, transparency, and profitability with the advanced inventory management tools available to your business at a low price and no start up costs. Sign up today for free.
