Inventory ties up more than just shelf space. If you’re carrying more stock than you need, you’re paying for it in ways that can quietly drain your bottom line.

Carrying costs, also known as holding costs, include everything from warehousing and insurance to depreciation and lost inventory. Understanding what you’re really paying for is the first step toward better control.

What Are Carrying Costs?

Carrying costs are the total expenses a business incurs to store and maintain unsold inventory. These costs can represent up to 25 percent or more of the total value of your inventory, often without teams realizing it.

Tracking these costs helps you:

• Identify excess stock
• Improve cash flow
• Free up resources for growth

Breaking Down Inventory Carrying Costs

There are four main categories that make up inventory carrying costs.

1. Capital Costs

This is the biggest contributor. Capital costs represent the money tied up in the inventory itself—what you paid to acquire and finance it. Every day inventory sits on your shelf is a day that capital is not being used elsewhere.

Includes:

• Purchase price of goods
• Interest on borrowed funds
• Opportunity cost of not using capital elsewhere

2. Storage Costs

Inventory needs space, and space costs money. This includes the physical storage itself and the infrastructure to support it.

Includes:

• Rent or depreciation on warehouses
• Utilities
• Handling equipment
• Inventory management systems

3. Service Costs

These are the costs tied to keeping your inventory compliant, safe, and ready for sale.

Includes:

• Insurance premiums
• Security systems
• IT support
• Taxes on stored goods

4. Risk Costs

The longer you hold inventory, the more you risk shrinkage, damage, and obsolescence.

Includes:

• Theft
• Product damage
• Expired or outdated goods
• Inventory markdowns and write-offs

Did you know? A well-balanced inventory system helps cut carrying costs by reducing waste, improving turnover, and keeping stock levels aligned with real demand.

Why Carrying Costs Matter

High carrying costs reduce profit and can limit your ability to grow. Here’s what they affect:

• Cash flow – Tied-up capital limits investment in other areas
• Pricing – Holding costs increase the true cost of goods sold
• Efficiency – Overstock leads to clutter, errors, and delayed fulfillment
• Competitiveness – Tighter margins make it harder to compete on price or service

The longer inventory sits unsold, the more expensive it becomes.

How to Reduce Carrying Costs

Lowering your inventory carrying costs does not require drastic cuts. It requires better visibility.

Here’s what helps:

• Accurate demand forecasting to avoid over-ordering
• Automated stock alerts for low or excess inventory
• Cycle counts and audits to prevent shrinkage and identify slow movers
• Cloud-based inventory tracking to monitor movement in real time
• Barcode scanning to speed up receiving and reduce human error

One System That Helps You Do It All

Wasp InventoryCloud gives you complete visibility into your inventory from one location or many.

With real-time tracking, automated alerts, and mobile access, you can reduce waste, respond faster, and make smarter decisions across your operation.

• Optimize reorder points
• Know what’s in stock at all times
• Eliminate guesswork with real-time reports
• Improve inventory turnover

Explore InventoryCloud

Frequently Asked Questions

What is included in inventory carrying costs?

Carrying costs typically include capital costs, storage costs, service costs, and risk costs. These represent the full range of expenses involved in holding unsold inventory, from warehouse rent to inventory depreciation.

What percentage of inventory value is carrying cost?

Carrying costs often range from 20 to 30 percent of the total inventory value, though this can vary by industry, storage methods, and inventory turnover rates.

How can I reduce inventory carrying costs?

You can reduce carrying costs by improving demand forecasting, automating stock alerts, performing regular cycle counts, and using cloud-based inventory management tools like Wasp InventoryCloud.

Why are high inventory carrying costs a problem?

High carrying costs reduce profitability, tie up capital, increase the risk of obsolescence, and lead to storage inefficiencies. They can also make it harder to compete on price or invest in growth.

What is the difference between ordering cost and carrying cost?

Ordering costs refer to the expenses involved in placing and receiving inventory orders, such as administrative time and shipping fees. Carrying costs are the ongoing costs of storing and maintaining that inventory until it is sold.