Inventory Carrying Cost

Inventory carrying cost (ICC) is the annual cost of carrying (or holding) the average inventory value. It is computed by multiplying the average inventory value (AIV) by the inventory carrying rate (ICR).

ICC = AIV x ICR

For example, if the average inventory value in a warehouse is $10,000,000 and the inventory carrying rate is 30% per year, then the inventory carrying cost in the warehouse is ...

ICC = $10,000,000 x 30%/year = $3,000,000 per year.

The inventory carrying rate (ICR) is an annual percentage applied to the average inventory value to estimate inventory carrying charges. The rate includes the opportunity cost of capital (every dollar invested in inventory could theoretically be earning the opportunity interest rate), insurance, taxes, loss, and obsolescence. With this definition, the ICR typically ranges between 10% and 30% per year. In addition, storage and warehousing costs may also be included if they are not already being considered as a part of total logistics cost. If warehouse operating costs are included, the inventory carrying rate typically ranges between 15% and 40%. In most cases corporations underestimate their inventory investment and associated carrying charges. In many cases corporations do not even have a standard inventory carrying rate.

The average inventory value (AIV) for an item, i, should be estimated as the product of the average inventory level (AIL) in units and the unit inventory value (UIV). The unit inventory value is the investment in or cost of creating each unit of inventory at its current status (raw material, work in process, or finished goods). The unit inventory value is typically the selling price less the margin.

AIVi = AILi * UIVi