Inventory has a cost even when nothing is moving. The carrying-cost rate is a way to express the annual cost of keeping money and material tied up in stock.
ASCM groups the underlying cost into capital cost, inventory service costs, storage-space costs and inventory-risk costs. Those categories are more useful than treating the percentage as a mysterious finance number.
A shop carries an average of $40,000 in sheet goods, edgebanding, hardware and other stocked material. If its working carrying-cost rate is 20% per year:
- CAPITALThe cost or opportunity cost of money tied up in inventory instead of being used elsewhere in the business.
- SERVICEInventory-related insurance, taxes and handling or administrative costs that rise because the stock exists.
- SPACEWarehouse or shop-floor space, storage infrastructure and other occupancy costs attributable to holding inventory.
- RISKObsolescence, damage, deterioration, shrinkage and other losses that make inventory worth less than what was paid for it.
If inventory is $20,000 for most of the year and jumps to $60,000 before a busy season, using the $60,000 snapshot would overstate the annual holding base. Use a monthly average, rolling average or another period that represents how much inventory is actually carried.
The calculator estimates holding cost. It does not decide whether the inventory is necessary, whether a lower stock level would create shortages, or whether supplier lead times justify a larger buffer.