Inventory holding costs: definition, calculation and reduction

Inventory holding costs are all ongoing costs incurred as a result of storing goods. These include, in particular, tied-up capital, space costs, staff costs, insurance and risks such as shrinkage, spoilage or obsolescence.

They are a key performance indicator in logistics, as they demonstrate how economically stock levels are managed.

High storage costs put a strain on liquidity, increase capital tied up in stock and reduce profitability.

• Inventory holding costs arise when goods remain tied up in the warehouse for an extended period.
• The main cost drivers include capital tied up, storage space, staff costs and inventory risks.
• Rising stock levels and long storage times significantly increase running costs.
• Companies can specifically reduce these costs through better planning and more efficient processes.

What are storage costs?

Inventory holding costs comprise all expenses directly caused by holding stock.

These include interest on capital tied up, rent and energy costs for storage space, insurance, administrative costs, and losses in value due to shrinkage or obsolescence.

For valuation purposes, it is important to distinguish between fixed and variable costs. Fixed costs remain largely constant, whilst variable costs increase with stock levels, storage duration or movements within the warehouse.

Difference between storage costs and inventory holding costs

Storage costs refer to all costs associated with warehouse operations. These also include goods receipt, order picking, technology and internal transport.

Inventory holding costs are only the portion directly attributable to the act of storing goods itself. This distinction helps to ensure a clear cost analysis.

How are inventory holding costs calculated?

The standard formula for calculating is:

Inventory holding costs = average stock × inventory holding cost rate

In many companies, the inventory holding cost rate amounts to between 15 and 30 per cent of the average stock value per year. In addition, it may be useful to consider storage costs per square metre or per product group.

How can costs be reduced?

Anyone wishing to reduce warehousing costs must optimise stock levels, processes and planning as a whole. Key measures include:

• Lower stock levels reduce capital tied up in stock and minimise the risk of excess stock.
• Appropriate order quantities improve the balance between availability and storage costs.
• Transparent material flows help to identify unnecessary movements and stock levels at an early stage.
• Inventory management optimisation delivers lasting improvements to warehouse efficiency.

Digital systems support these processes. Integrating an ERP system provides transparency regarding stock levels, lead times and movement data.

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Ergoficiency® uses objective data to highlight strain, time wastage and organisational weaknesses, creating a solid foundation for targeted improvements.

Using the packing table configurator, you can then plan a solution that is ergonomically well thought-out and precisely tailored to your processes and requirements.

FAQ

How do you calculate inventory holding costs?

The costs are calculated by multiplying the average stock level by the inventory holding cost rate.

Which costs are included in the inventory holding costs?

These primarily include capital tie-up costs, space costs, staff costs, insurance and losses in value due to shrinkage or obsolescence.

How can one reduce inventory holding costs?

Costs can be reduced through lower stock levels, appropriate order quantities, transparent processes and better stock management.