Inventory Carrying Cost

Capital Allocation

Money spent on inventory that sits in a warehouse is money that cannot be invested in other parts of the business. The inventory carrying cost represents a significant drain on the liquidity of a firm, as the opportunity cost of that capital is usually measured against the borrowing rate of the company.

Storage Overhead

Physical space requires payment for rent, utilities and the labor needed to manage the movement of boxes. If products stay in the warehouse for too long, they may become obsolete or expire, leading to a total loss of the value of the item. This cost usually totals between twenty and thirty percent of the value of the inventory each year.

High expenses in this category indicate that the supply chain is not moving goods efficiently to the final customer.

Risk Factor

Holding large amounts of stock increases the exposure to market price drops and physical damage. Reducing the time between receiving and selling a product is the most effective way to lower these financial burdens.