What Is Inventory Carrying Cost?

Inventory carrying cost is the cost associated with the holding and managing of inventory. These costs can consist of the following:

• Opportunity Cost: The value of one choice over another and what must be given up to obtain something else.
• Shrinkage: The loss of inventory due to theft, damage or loss.
• Insurance and Taxes: Insurance provides inventory protection, while taxes are the cost of having and holding inventory. Both cost the inventory holder money.
• Total Obsolescence for Raw Material, Works in Process and Finished Goods Inventory: Inventory that is no longer useable or saleable due to being out-of-date or obsolete.
• Channel Obsolescence: Materials that become out-of-date or obsolete while in a distribution channel.
• Field Service Parts Obsolescence: Inventory that becomes out-of-date or obsolete while being stored within a warehouse or distribution center.
• Inventory Cycle Counting: See Cycle Counting