Carrying Cost Of Inventory

Carrying cost of inventory is the total cost to store products you haven't sold yet...the cost of the building to put it in, the cost to insure the building (and the inventory), taxes on the building, the cost of staff to maintain the inventory, and so on. It also looks at opportunity cost. Could the money being spent to maintain all this inventory be better used elsewhere in the company?

Generally, the carrying cost is viewed as a percentage and tends to land somewhere between 20 and 30 percent of the cost to purchase the inventory initially. Inventory is often the biggest asset the business has, so if it's costing more to maintain it than can be made when it sells, something is out of whack.

In that case, management needs to consider a few variables: Do they have too much inventory? Are they selling their products too cheaply? Are they storing them in a way that's too expensive? The carrying cost percentage is the first measuring tool to look for these issues.

Say you're running the biggest whoopie cushion factory in the world. You are whoopie cushion royalty. Sitting on the big throne. You find the carrying cost of your inventory is $7 each. Problem is, you sell for $5. It might be a good time to have a sale to get rid of inventory and rethink your storage system. You might need...a blowout.