Know the Figures

Inventory Carrying Cost Calculator

What holding stock costs you a year — the number that never appears on an invoice.

Replaces: Supply-chain consulting reviews and paid ERP analytics

How to use it

Enter the average value of the stock you hold and the four costs of holding it, each as a percentage of stock value. The total is what inventory costs you every year simply for existing, before anything is sold.

Where the number comes from

  • The four components are added to give a single carrying rate, then applied to the average inventory value.
  • Cost of capital is the largest and least visible: money in stock is money not in the bank, not paying down debt, and not funding growth.
  • Inventory turns is cost of goods sold divided by average inventory — how many times a year you sell through your stock.
  • Days on hand is 365 divided by turns, which is the same figure expressed as time.
  • The reduction scenario applies the same carrying rate to the stock you would no longer hold, separating the one-off cash release from the recurring annual saving.

What goes wrong

The part most calculators leave out.

  • Carrying rates vary enormously by product. Electronics and fashion obsolete fast and can exceed 30% a year; stable industrial parts may sit well below 15%. A single blended rate across a mixed catalogue hides both.
  • Averages conceal seasonality. A retailer holding four times its normal stock in November has a carrying cost that the annual average does not describe.
  • Cutting inventory is not free. Smaller, more frequent orders raise ordering costs and freight, and thin stock raises the risk of a stockout that costs a customer rather than a margin point.
  • Obsolescence is the component people guess at and it is often the largest. If you have written off stock in the past three years, that history is the rate to use.
  • This measures the cost of holding stock, not the right amount to hold. Service levels, lead times and demand variability determine that, and none of them appear here.

The bulk discount that lost money

A distributor is offered 8% off a 400,000 order for taking six months of stock instead of six weeks. The saving is 32,000 and looks obvious. But the extra stock sits for an average of an additional four and a half months, and at a 20.5% annual carrying rate that costs about 34,000 in capital, storage, insurance and obsolescence. The discount is negative before counting the warehouse space it displaced or the risk that the product changes. Purchasing is measured on unit price, which is precisely why this decision gets made repeatedly.

Questions

What is a typical inventory carrying cost?
Commonly quoted ranges run from about 15% to 30% of inventory value a year, but the spread within that is driven almost entirely by obsolescence risk. Use your own write-off history rather than a rule of thumb.
Should cost of capital be my borrowing rate?
Use whichever is higher: what the money would cost you to borrow, or what it would earn in its best alternative use. For a business with growth opportunities it is turning down for lack of cash, the second figure is usually much larger.
Does higher inventory turnover always mean better?
Up to a point. Very high turns can mean you are running too lean, taking stockouts, paying premium freight and losing sales you never see. The cost of holding stock has to be weighed against the cost of not having it.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.

Last updated .

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