Inventory carrying cost, also known as holding cost, refers to the total cost of holding inventory. It includes both tangible and intangible costs, such as warehousing costs, salaries, transportation and handling, taxes, insurance, depreciation, shrinkage, and opportunity costs. Carrying cost also includes the opportunity cost of reduced responsiveness to customers changing requirements, slowed introduction of improved items, and the inventorys value and direct expenses, since that money could be used for other purposes.

To calculate inventory carrying cost, businesses add up the expenses outlined above over one year and divide those carrying costs by total inventory value, then multiply the number by 100 for a percentage. The resulting figure can be used to determine if inventory carrying costs are optimum or whether they can be reduced. Carrying costs generally run between 15% and 30% of the total cost of inventory, although it varies depending on the industry and the business size.

Inventory carrying cost is an important metric that a company can use to determine how much income can be earned based on current inventory levels. It is also a crucial metric that helps determine whether a business is running an efficient operation. High carrying costs could mean that the organization has more inventory on hand than it needs based on demand, that it needs to adjust the frequency with which it places orders with manufacturers or distributors, or that it could do better at keeping stock moving.

To limit inventory carrying costs, businesses can implement best inventory control practices, such as effici...