Total the cost of holding stock: capital, storage, insurance, shrinkage and obsolescence.
Carrying cost is usually 20 to 30 per cent of inventory value a year once capital, space, insurance and obsolescence are all counted. That is why cutting stock releases far more than the working capital alone. Buyers optimise purchase price and ignore carrying cost, which is how a bulk discount of 5% ends up costing more than it saves.
Inventory Carrying Cost
Carrying cost = average inventory value × (capital + storage + insurance + obsolescence) %
Carrying cost = average inventory value × (capital + storage + insurance + obsolescence) % Carrying cost is usually 20 to 30 per cent of inventory value a year once capital, space, insurance and obsolescence are all counted. That is why cutting stock releases far more than the working capital alone.
Buyers optimise purchase price and ignore carrying cost, which is how a bulk discount of 5% ends up costing more than it saves.
This calculator takes 5 inputs: Average inventory value, Cost of capital, Storage and handling, Insurance and taxes, Shrinkage and obsolescence. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.