Inventory Carrying Cost

Posted in Operations and Supply Chain Terms, Total Reads: 228

Definition: Inventory Carrying Cost

Inventory carrying cost includes the cost of warehousing the unsold items, financial costs and inventory costs. Warehousing costs include costs of rent, depreciation, taxes, utilities and salaries. Financial costs include the opportunity costs whereas costs related to perishability, pilferage, shrinkage and insurance are included in inventory costs.

These costs are different for different industries and companies. These are generally calculated as a percentage of cost of inventory items at the end of the year.

Example: If a company stores $300000 worth of goods on an average in an year and incurs the extra costs of carrying inventory $60000. Then the cost of carrying inventory is said to be 20%


Companies hold the inventories for following purposes:

• Safety Inventory, to act like a buffer if the customer demand exceeds the supply

• To cater to the sudden seasonal demand

• Companies purchase in bulk, to get materials at cheaper rates

• Dead inventory that has been returned from the stores need to be stored

Ways to Reduce Inventory Costs

• Improve the layout of warehouse to optimize space utilization

• Improve the labor productivity

• Operate on Just-in-Time inventory model

• Create effective databases so that accurate demand can be predicted

• Take some space on rent in high demand seasons rather than owning a big warehouse throughout the year

• Build long term relationship with suppliers so that goods are delivered to you at cheaper price



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