Inventory carrying costs are typically 20-30% of inventory value per year. Businesses that don't measure them are making decisions based on half the picture.
Components of Carrying Cost
Capital cost (the cost of money tied up in inventory), storage cost (rent, utilities, handling), insurance, obsolescence risk, and shrinkage — these components typically total 20-30% of inventory value annually.
Calculating Your Carrying Cost
To calculate carrying cost: (total carrying cost components) / (average inventory value) x 100. Once known, this percentage transforms procurement and inventory decisions.
Impact on Reorder Quantity
Carrying cost analysis often reveals that businesses are buying too much at once to get volume discounts. When carrying cost is factored in, smaller, more frequent orders are often more economic.
ERP and Real-Time Carrying Cost Visibility
ERP tracks the components of carrying cost in real time — space utilization, inventory value by location, insurance premiums. This visibility enables ongoing optimization rather than one-off analysis.
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