Carrying Cost
Carrying cost, also called inventory holding cost, is the total annual cost of keeping inventory on hand, expressed as a percentage of average inventory value. It includes capital costs tied up in stock, storage expenses like warehouse rent and labor, service costs such as insurance and taxes, and risk costs from shrinkage, damage, theft, and obsolescence. Typical values range from 20% to 30% per year.
In manufacturing, carrying cost quantifies the financial penalty of holding excess raw materials, work-in-progress, and finished goods. On the shop floor, high carrying cost pushes planners to reduce cycle stock, reorder lot sizes, and slow-moving component buffers, because every pallet of steel, resin, castings, or purchased subassemblies consumes capital and storage resources while adding obsolescence risk if the bill of material changes. In warehousing, carrying cost shapes slotting, storage density, staging time, and decisions between in-house storage and third-party logistics, since every extra day inventory sits increases rent, labor, utilities, insurance, and handling exposure. In raw-material tracking, carrying cost justifies tighter inventory visibility, faster receiving, better cycle counts, and lot-level traceability, because inaccurate records drive unnecessary replenishment and inflated average stock levels. For procurement, it balances order quantity against ordering frequency: larger buys may lower unit price but raise capital, storage, shrinkage, and obsolescence costs.
Which cost category usually dominates carrying cost in finance-heavy environments?
Capital cost, because tied-up cash has an opportunity cost and may require financing; this is explicitly included in standard carrying-cost definitions.
Why does carrying cost matter in MRP/ERP planning?
It is a key input to lot-sizing and inventory policy decisions, because the optimal order quantity depends on the tradeoff between ordering cost and holding cost; when carrying cost rises, recommended order quantities generally fall.
Does carrying cost include only warehouse rent and labor?
No. Standard definitions also include insurance, taxes, shrinkage, damage, theft, depreciation, obsolescence, and the cost of capital tied up in stock.