Inventory carrying cost, also known as inventory holding cost, refers to the total cost that a business incurs to store and maintain its inventory over a certain period in fulfilment and logistics.
Inventory carrying costs can include a variety of expenses. These are typically broken down into four categories: capital costs, storage costs, inventory service costs, and inventory risk costs.
Capital Costs
Capital costs are often the largest component of inventory carrying costs. These costs are associated with the investment made in purchasing the inventory. The capital cost is the opportunity cost of investing in inventory, as the money could have been used elsewhere in the business or to earn interest.
Storage Costs
Storage costs are the expenses associated with storing the inventory in a warehouse or other facility. These costs can include rent or mortgage payments, utilities, maintenance, and warehouse staff salaries.
Inventory Service Costs
Inventory service costs are the expenses related to managing the inventory. These can include costs for inventory management software, insurance, and taxes.
Inventory Risk Costs
Inventory risk costs are the potential costs that could be incurred due to changes in the value of the inventory. This can include costs due to obsolescence, shrinkage, and price declines.