Stock sitting in the warehouse is quietly costing you.

Carrying cost is what it costs to hold inventory over a year: capital tied up, storage space, insurance, shrinkage, obsolescence and handling. Sellers who ignore it tend to over-order because the sticker price of a bulk discount looks better than it actually is.

The quick-estimate method

A common shortcut is annual carrying cost = average inventory value × carrying rate, where the rate is often estimated between 20-30% of inventory value per year depending on industry. This is fast but hides which specific cost is driving the total.

The detailed method

Add capital cost (what that tied-up cash could otherwise earn or what it costs to borrow), storage, insurance, shrinkage, obsolescence and handling separately. This is more work but shows you which lever to pull — a high shrinkage line points to a security problem, not a financing problem.

Weigh it against bulk discounts

A 10% bulk-order discount is not automatically worth it if carrying that extra inventory for six extra months costs more than 10% of its value in tied-up capital and storage. Run both numbers before committing to a larger purchase order.

It connects directly to reorder decisions

Lower carrying cost favors smaller, more frequent orders; higher supplier minimums or shipping costs favor larger ones. Carrying cost and reorder point should be reviewed together, not treated as separate questions.