Inventory Carrying Cost Analysis

Inventory Carrying Cost Analysis#

Carrying cost components: capital cost (8-15% of inventory value, your cost of money), storage (3-5%, rent and utilities), insurance (1-2%), shrinkage and obsolescence (2-5%), handling (2-3%), and taxes (0.5-1%). Total: 20-30% annually. On $10M inventory, that's $2-3M/year in carrying costs. Every dollar of inventory reduction saves $0.20-0.30 annually.

Identifying Slow-Moving and Dead Stock#

Run an ABC-XYZ analysis quarterly. A items (top 80% of revenue): optimize availability. B items (next 15%): maintain moderate stock. C items (bottom 5%): minimize or eliminate. X items (stable demand): lean inventory. Y items (variable): moderate safety stock. Z items (sporadic): make-to-order if possible. Most companies find 15-25% of SKUs are dead stock generating zero revenue.

Economic Order Quantity in Practice#

EOQ = √(2DS/H) where D = annual demand, S = order cost, H = holding cost per unit. For a product with 10,000 annual demand, $50 order cost, and $5 holding cost: EOQ = √(2×10000×50/5) = 447 units. Order 447 units at a time, 22 times per year. This minimizes combined ordering + holding costs. Adjust for quantity discounts and minimum order requirements.

• Inventory carrying costs run 20-30% of inventory value annually — most companies significantly underestimate this