Inventory carrying cost is what it costs to hold stock for a year, as a share of the stock's value: carrying cost % = (capital + storage + insurance + spoilage + obsolescence + handling) ÷ average stock value. Capital is the cost of the money tied up; storage is the share of space, cooler and freezer that grows with what you hold; spoilage is what expires or goes bad before it's used. In textbook examples, capital and storage are the big parts. For a food maker, spoilage often is, which is why a food business's carrying cost can run well above the textbook figures. In the example below, a small kitchen holding $8,800 of stock on average carries it at 67% a year, 5.6% a month, and $2,232 of that is spoilage. That number decides whether a bigger order is a saving: here, a price break worth $90 on 480 cans costs $181 to hold. Below is the formula, the example, what it does to ordering, and a free calculator.
The short version
- Carrying cost % = a year's holding costs ÷ average stock value.
- Holding costs: capital, storage, insurance, spoilage and expiry, obsolescence, handling.
- Count only the storage that grows with how much you hold, not the whole rent.
- For a food maker, spoilage is often the largest part.
- Divide by 12 for a month's carrying cost, the number to use on a bigger order.
- A price break is only a saving if it beats the cost of holding the extra stock.
- TaroStack values your stock, records write-offs by reason, and forecasts what will expire. More below.
The formula
| Part | What it is | How to find it |
|---|---|---|
| Capital | The money tied up in stock | Average stock value × your cost of money |
| Storage | Space, cooler and freezer power that grow with what you hold | A share of rent and power |
| Insurance | Cover on stock | Your policy's rate × stock value |
| Spoilage and expiry | Stock that goes bad or passes its date | Your write-offs, by reason |
| Obsolescence | Packaging for a discontinued product, lines that stopped selling | What you'll never sell at full price |
| Handling | Moving, counting, rotating | Hours × your rate |
Carrying cost % = the six added up ÷ average stock value. Average stock value is the start and end of the year averaged, or better, the twelve month-ends averaged.
A worked example
Windward Roots, the made-up taro business I use in these examples, holds $8,800 of stock on average:
| Part | A year |
|---|---|
| Capital: $8,800 × 8% | $704.00 |
| Storage: share of the walk-in, freezer power and dry store | $1,500.00 |
| Insurance: 3% of stock value | $264.00 |
| Spoilage and expiry: write-offs, about $186 a month | $2,232.00 |
| Obsolescence: old labels, a discontinued flavor's pouches | $600.00 |
| Handling and counting | $600.00 |
| Carrying cost | $5,900.00 |
| As a share of average stock | 67.0% a year, 5.6% a month |
Spoilage is nearly 38% of the total, more than capital and insurance together. That's the shape of carrying cost for a business that sells food with a date: the money tied up costs less than the stock that doesn't make it to a customer. What the write-offs are and how to record them is in what is expired stock, and where the $8,800 average comes from is in inventory KPIs.
What it does to ordering
The month's carrying cost is the number to use when a supplier offers a better price for a bigger order. Windward Roots' coconut milk supplier offers 10 cents off a can, $48, and saves $42 of freight, if the kitchen takes 480 more cans than it would otherwise, three months' worth.
| Amount | |
|---|---|
| Extra stock: 480 cans at $2.25 | $1,080.00 |
| Months it sits before it's used | 3 |
| Cost of holding it: $1,080 × 3 × 5.6% | $181.02 |
| Saving: price break and freight | $90.00 |
| Worth it? | No: it costs about twice what it saves |
The bigger order would be worth it with a bigger saving, a shorter wait, or a product that doesn't expire. The same sum is behind ordering quantities in economic order quantity and the trade-off in minimum order quantity.
Bringing it down
| Lever | Which part it lowers |
|---|---|
| Order closer to what you use | Capital, storage, spoilage |
| First-expired-first-out on every shelf | Spoilage |
| Watch what's expiring before it does | Spoilage |
| Find slow stock early | Obsolescence |
| Fewer, larger counts of cheap items; more counts of costly ones | Handling |
How much stock to keep in the first place is in how much inventory to keep on hand.
Get the calculator
Download the inventory carrying cost calculator. Type your average stock value, cost of money, and a year's storage, spoilage, obsolescence and handling with your insurance rate; it works out the carrying cost a year and a month, and whether a bigger order's saving beats the cost of holding it. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
The calculator needs a year's spoilage, a stock value and a sense of what's slow, and in a small kitchen all three are usually estimates. Write-offs go in the bin without a record, the stock value is a year-end guess, and the slow lines are found at the year-end count, when it's too late to do anything but throw them away.
How TaroStack does it
TaroStack keeps the figures that make carrying cost a number instead of a guess.
Stock value, by month. Stock value by site and by month comes from FIFO cost layers, landed costs included, so the average stock value is a fact.
Spoilage, recorded and forecast. Every adjustment carries its reason, expired, spoiled, damaged and the rest, so write-offs are reported by reason, item and site at their cost. A forecast shows what will expire unsold and what it's worth, while there's time to use it, and stock goes out first-expired-first-out by default.
And slow stock, before it's obsolete. Stock that isn't moving shows how long since it last went out. The reorder list shows days of cover against each supplier's real lead time and minimum, with reorder points suggested from how stock moves, so orders sit closer to what you use.
| The figure | Spreadsheet | In TaroStack |
|---|---|---|
| Average stock value | A year-end guess | Stock value by month |
| A year's spoilage | Unrecorded | Write-offs by reason, at cost |
| What's about to expire | Found too late | The expiry forecast |
| Slow lines | Found at the count | Days since each last went out |
Stock value, write-offs by reason, the expiry forecast and the reorder list are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.