A supplier offers 8% off if you take a year’s supply instead of a quarter’s. It sounds like a saving. Whether it is depends on a number most businesses have never calculated: what it costs them to hold stock for a year.
That number is the carrying cost, also called the holding cost. It is usually expressed as a percentage of the stock’s value per year, and for most product businesses it lands somewhere between 20% and 30%.
What goes into it
Carrying cost has four parts.
Cost of capital. The money in stock could be earning a return, repaying a loan or paying down an overdraft. Use the interest rate you pay, or the return you expect from the business, whichever is higher. Typically 5% to 12%.
Storage. Rent or depreciation of the warehouse space, racking, utilities, insurance on the building, and the share of staff time spent handling and counting stock. Typically 3% to 8% of stock value, more for bulky or refrigerated goods.
Service. Insurance on the stock itself, stock-related taxes where they apply, and the cost of the systems and people that keep track of it. Typically 1% to 3%.
Risk. Shrinkage, damage, obsolescence and the markdowns needed to clear stock that has lost value. This is the part that varies most: under 2% for durable spare parts, over 15% for fashion, electronics or anything with a shelf life.
A worked example
A business holds an average of €200,000 of stock over the year.
| Component | Annual cost | Share of stock value |
|---|---|---|
| Capital at 7% | €14,000 | 7% |
| Warehouse space and handling | €12,000 | 6% |
| Insurance and systems | €4,000 | 2% |
| Shrinkage, damage and markdowns | €16,000 | 8% |
| Total | €46,000 | 23% |
Holding €200,000 of stock costs this business €46,000 a year, or about €3,800 a month. Every €10,000 of stock it no longer needs to hold saves roughly €2,300 a year.
Using it on the discount
Back to the supplier’s offer. The product costs €10,000 for a quarter’s supply, €40,000 for a year’s at 8% off, so €36,800.
Buying quarterly, the average stock of this product is about half a quarter’s supply, €5,000. Buying yearly, the average is half a year’s supply, €18,400. The extra €13,400 of average stock costs 23% a year to hold: €3,080.
The discount saves €3,200. The carrying cost eats €3,080 of it. The real saving is about €120, before counting the risk that demand changes over the year. At a 25% carrying cost the deal loses money.
The same arithmetic applies to every order quantity decision. Larger orders cost less per order and more to hold. Your carrying cost rate is the number that tells you where the balance sits.
How to lower it
The rate itself is hard to move: rent is rent. The value it applies to is not.
- Order to usage, not to round numbers. Cover days set from real consumption keep stock close to what the next few weeks need.
- Shorten the gap between supplier and shelf. A supplier who delivers in 5 days instead of 30 lets you hold three weeks less of every product they supply.
- Find and clear dead stock. Stock that will never be used carries the full rate for nothing.
- Watch the trend, not the snapshot. Stock value drifting up month after month, while sales are flat, is carrying cost growing quietly.
How StockBold helps
The number you need every month is the average inventory value, and StockBold gives it to you two ways. The inventory valuation report shows the value of your stock on any date, product by product, at true cost: purchase price plus duties, freight and other landed costs, under FIFO, LIFO or average cost. The inventory value history report draws the value at the end of each of the last 12 months, so you can see at once whether the capital tied up in stock is growing or shrinking, and average it for the carrying cost formula.
To bring the value down, the product turnover and inventory ageing reports point at the products holding the most for the longest, and each product’s cover days and safety stock control how much the next order brings in.
Read more about stock valuation in StockBold, or the help guide on the inventory value history report.