Carrying Cost

Carrying cost is the price of keeping inventory on hand, and it makes over-ordering expensive even when every unit eventually sells. It includes the cost of capital, storage fees, insurance, shrinkage, and obsolescence. A rate of roughly 20 to 30% of inventory value per year is a common starting estimate. For example, a brand holding an average of $250,000 of inventory at a 25% rate spends about $62,500 a year just to hold it. That cost belongs in every reorder, bulk discount, and markdown decision.

Carrying cost was first formalized in 1913, when Ford W. Harris's economic order quantity model set the cost of holding inventory against setup cost to find the cheapest batch size.

Annual carrying cost = average inventory value × carrying cost rate

Open the Carrying cost calculator on its own page

What is included in inventory carrying cost?

Carrying cost includes the cost of capital tied up in inventory, warehouse storage fees, insurance, taxes, shrinkage, damage, and obsolescence. Storage fees are the most visible part, but capital cost is often the largest.

How do you calculate inventory carrying cost?

Multiply average inventory value by your annual carrying cost rate. At $250,000 of average inventory and a 25% rate, annual carrying cost is $62,500.

How can a brand reduce carrying cost?

Order smaller quantities more often where freight allows, clear slow movers before they age, and cut SKUs that rarely sell. Fewer days of inventory lowers both storage fees and the cash tied up.

• Inventory TurnoverHow often you sell through your inventory
• Dead StockInventory that no longer sells
• Economic Order QuantityEOQOrder size with the lowest total cost