Inventory Carrying Cost: Holding SGD 500K Stock Costs SGD 100K/Year Without Selling a Unit

The Five Components of Inventory Carrying Cost#

(1) Capital cost: money tied up in stock could earn interest or repay debt. At 4.5% overdraft: SGD 500K inventory = SGD 22.5K/year opportunity cost. (2) Storage: warehouse rent, utilities, handling. (3) Insurance: stock insurance typically 0.3-0.8% of inventory value. (4) Shrinkage: theft, damage, counting errors — typically 0.5-2% of inventory. (5) Obsolescence: fashion/electronics risk going unsaleable — estimate 2-5%/year. Total: 18-28% of inventory value annually. Industry rule of thumb: 25%.

Carrying Cost by SKU — Where the Drain Is#

Aggregate carrying cost hides the real damage. A SKU sitting unsold for 12 months costs 25% of its purchase price to hold. Example: SKU X purchased SGD 10K, sat unsold 12 months = SGD 2.5K carrying cost. Sell for SGD 8K (20% markdown) = lose SGD 2K on sale, but save SGD 500 (net: -SGD 2K vs holding cost -SGD 2.5K — selling is still better). Beyond 12 months, holding cost exceeds markdown loss on most items.

Calculating Your Break-Even Liquidation Price#

If item cost SGD 100 and has been in stock 6 months (6/12 × 25% = 12.5% carrying cost = SGD 12.50 spent holding it): break-even liquidation price = SGD 100 cost − SGD 12.50 holding cost = SGD 87.50 (any price above SGD 87.50 is better than holding another 6 months). At 12 months: holding cost = SGD 25 → liquidation break-even = SGD 75. Sell >SGD 75 = better than holding. Reframe: markdown is not a loss, it is a carrying cost recovery.

AskBiz Carrying Cost Analytics#

Calculates carrying cost per SKU based on purchase cost, days in stock, and cost-of-capital rate. "Top 10 slowest SKUs: total inventory value SGD 85K, average 210 days in stock, estimated carrying cost SGD 12K annualised. Carrying cost per SKU ranges SGD 400 to SGD 2.8K. Recommendation: run clearance on 6 SKUs (>180 days): liquidation price ≥ SGD 62K recovers more than holding. Free up SGD 85K cash, save SGD 12K carrying cost. Net benefit: SGD 85K + SGD 12K vs potential markdown loss SGD 15K = net positive SGD 82K."

• Retailer: SGD 500K inventory on hand.
• Carrying cost: capital cost 4.5% (overdraft rate on SGD 500K) = SGD 22.5K/year.
• Warehouse rent SGD 5K/month = SGD 60K/year.