Inventory Carrying Costs

What does it mean?  Basically it is a calculation that helps you understand what it is costing you to hold stock whilst it is in your possession. Successful organizations typically have a good handle on what these maintenance costs are.  The critical component is the Inventory Carrying rate or percentage.This is constructed from several elements……… capital cost, taxes, insurance, obsolescence & storage.  A typical annual inventory carrying rate is around 25%, the capital investment being the leading factor.  Whilst this is general, there can be extreme variations, particularly with the capital cost component.

The calculation is as follows:

Cost of maintaining the inventory for a full year = Inventory Carrying Rate ( eg 25%)  x  Average Inventory Value”
This then, can be used for management policy and drives the strategy behind planning & forecasting decisions.

Warning- the Inventory Carrying Rate should always be calculated by business. Using textbook or industry averages can be risky and could paint a false picture.

Jim Coley
Online Distribution