Carrying Cost Rate
The annual cost of holding inventory as a percentage of its average value: capital, storage, service and risk costs divided by average inventory.
The carrying cost rate divides a year of holding costs by the average value of the stock held. The costs usually fall into four buckets: the cost of the cash tied up, storage, service costs such as insurance and property tax, and risk costs such as shrinkage and obsolescence. Published ranges of 15% to 30% or more are common, but the right rate is the one built from a business’s own figures.
Only part of the rate is avoidable: cost of capital and shrinkage fall with the stock, while rent on space that cannot be given back does not. A saving from cutting inventory should be estimated with the avoidable rate.
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