What is Carrying Cost?

As a warehouse manager you might see many storage locations full of the same product. From your experience you know it might take months to sell that much inventory. But you don’t have much input. Your job is to get product checked in, keep it safe while in your stead and get it picked and shipped as efficiently as possible. However, you know having too much inventory can sometimes be as bad as not having enough. It can get in the way and even have a negative impact on productivity.

What can you do? Well, you can start by raising the flag. Let management know of your concern for overstock. Sure, management can see the 180 days inventory on hand (DIO) for product ABC if they look at the reports, but like too many alerts and messages, reports can become white noise over time. And depending on who views the reports the 180 DOI may be viewed favorably. If you want to a to at least make this a level yellow issue, trying putting things into dollars. For every $1 of product kept in inventory the company spends an additional 15-40% for the luxury to have the inventory. This is called carrying cost and is a very real, if not always factored, cost. At a high-level carrying costs accounts for the cost of capital, storage costs and risk costs.

Capital costs are the cost of financing and opportunity costs of using the money.

Storage costs are generally the variable component of space, materials handling, utilities, maintenance and security based on the quantity of stored inventory.

Risk costs are associated to inventory becoming unusable or salable due to damage, spoilage, obsolescence, theft, etc.

You will need to work with someone from your finance organization to determine your actual carrying cost percentage. It shouldn’t be a big exercise. They probably have a standard number they use.

If you really need to know how carrying cost is calculated, you can see an original article publication here.

Depending on the value of your inventory and the amount of excess, by sharing this information with management, you may deserve a bonus. Speaking of a bonus check out this podcast with Dr. Doug Lambert, who enhanced and standardized the carrying cost concept in 1976.

For more information on how WMS Software can transform your business, download our “Business Case Development” whitepaper here.


Chris Barnes is the Supply Chain Doctor and part of the APICS Coach network. He holds a B.S., Industrial Engineering with an Economics Minor, from Bradley University, and an MBA with emphasis on Industrial Psychology with Honors from the University of West Florida. He is one of the few people in the world to hold CPIM-F, CLTD-F and CSCP-F designations from ASCM/APICS.