Inventory carrying costs are an often overlooked indicator, but one that weighs heavily on a company’s overall performance. Between tied-up cash, obsolescence risks and warehousing costs, it can represent up to 30% of inventory value. Understanding, calculating and optimizing this cost is therefore becoming a strategic priority for logistics and finance managers.

In an economic context where every euro counts, the cost of stockholding has become a key competitive issue. It’s not just a question of stocking products, but of measuring their true financial weight. Capital investment, obsolescence, hidden costs: any uncontrolled inventory is detrimental to profitability.

This article offers a comprehensive approach to understanding this cost, calculating it accurately and, above all, identifying the most effective optimization levers. From theoretical fundamentals to practical tools such as OMS/WMS and case studies, discover how to turn inventory management into a strategic asset.

What is inventory carrying cost?

Cost of inventory definition

Understanding inventory carrying costs is the key tooptimizing your company’slogistics and financialperformance. It’s a key indicator for logistics and finance managers who want to reconcile service quality, profitability and cost control. This cost is a strategic lever, often under-exploited, but essential in a context of strong pressure on margins.

A clear definition for a strategic challenge

Inventory carrying costs are the total cost of maintaining goods in a warehouse, regardless of whether or not they are sold. Contrary to popular belief, this cost is not just related to space rental, but encompasses a wide range of expenses, often invisible in operational accounting.

On the scale of an e-commerce SME, it is common to observe a rate of possession of between 20% and 30% of the average stock value. This percentage can quickly translate into tens of thousands of euros annually. This is why this KPI should never be neglected in financial analyses or logistics optimization plans.

The various cost items included

The nature of expenses varies according to the logistics structure, but some are common to all companies, whatever their sector of activity or size. These include the cost of warehouse equipment, which plays a central role in the physical management of stock.

To accurately assess the cost of ownership, you need to identify the key items:

  • Warehousing: includes costs related to premises, energy and equipment maintenance.
  • Fixed capital: corresponds to cash tied up in inventories, to the detriment of other investments.
  • Obsolescence: loss of value of products that have been kept in stock for too long, and are sometimes unsaleable.
  • Insurance and security: protection against risks (theft, fire, damage) and surveillance costs.
  • Internal handling: movements, equipment and tools required for inventory management.

Each of these items needs to be integrated into an analytical approach to cost of ownership. Identifying them makes it easier to target areas for reduction and optimization.

How to calculate inventory carrying costs

Knowing how to calculate this cost enables you to measure its real impact on the organization, and take the right optimization decisions. There are simple but powerful formulas that can be integrated into logistics and financial management tools.

Formulas and calculation methods

The standard cost of ownership calculation is based on a generic formula:

Carrying cost = Average inventory value × Annual carrying rate

The average inventory value corresponds to the average of the values of inventories held at the beginning and end of the period under consideration (generally the year).

The possession rate is an overall estimate of storage-related expenses, expressed as a percentage. This rate can be defined on a flat-rate basis (often between 20 and 30%), but it is preferable to make a more detailed calculation, by adding up the rates corresponding to each cost item (warehouse, capital, insurance, obsolescence, etc.).

This cost can also be broken down by product type or family of goods, providing a more detailed view of logistics performance.

A concrete example

Let’s take the example of an e-tailer with an average annual inventory of €300,000. He has estimated his rate of ownership at 25%, integrating the various items described above. The annual cost would then be :

300 000 € × 25 % = 75 000 €

This means that €75,000 is tied up every year in keeping products in stock, without taking into account procurement or distribution costs. This amount can be dramatic if it concerns low-margin or slow-moving products.

This calculation can be refined using an analytical tool or WMS software, toidentify cost discrepancies between references or periods.

KPIs to track: possession rate, turnover

To effectively manage logistics, several key indicators need to be tracked:

  • Ownership rate: reflects the impact of storage on finances. The aim is to keep it below 20%.
  • Inventory turnover: the faster it is, the less products are tied up.
  • Dormant stock: identify discontinued products and sell them quickly.
  • Average shelf life: to be monitored to adjust restocking.

A combined analysis of these indicators is essential for making informed decisions, adjusting restocking policies or even rethinking overall logistics strategy.

The financial impact of cost of ownership

Inventory carrying costs

Cost of ownership has a direct impact on a company’s financial health. It is not simply an accounting item, but a structuring element which influences cash flow, profitability, and investment capacity in the short and medium term.

Cash assets

Every euro tied up in inventory is a euro unavailable for other uses: sales development, R&D, training, or modernization of logistics tools. This immobilization can have a serious impact, particularly in periods when cash flow is tight (seasonality, cost inflation, falling demand).

SMEs are particularly sensitive to this effect, as they rarely have sufficient dormant funds to absorb prolonged overstocking. Poor stock anticipation can therefore undermine the overall financial equilibrium.

Risk of overstocking and obsolescence

Excessive stock is a common pitfall: it can be the result of poor demand forecasting, buying too much because of tempting pricing conditions, or a misalignment between marketing and logistics.

Overstocking encourages obsolescence, with references becoming unsaleable or having to be liquidated at a loss. It also increases the risk of breakage, expiry and internal theft. These factors devalue assets and worsen results.

Profitability and cash flow under pressure

By weighing on margins and mobilizing cash, the cost of ownership acts as a brake on profitability. It lengthens the cash conversion cycle and complicates working capital management.

In an economic context where customers expect fast lead times, competitive prices and flexible return policies, costly logistics are a real competitive disadvantage. Conversely, optimized inventory management becomes a lever for profitability.

Reducing the cost of ownership: priority levers

Controlling the cost of ownership is also a key factor in scalability. A company that knows how to adjust its stock levels while maintaining its quality of service is better equipped to support its growth, manage peaks in activity or open up to new sales channels.

Fortunately, there are a number of concrete actions you can take to reduce this without compromising customer service.

Accelerate stock rotation

Implementing practices such as the FIFO (First In, First Out) method enables products to be sold in the order in which they arrive, thus reducing the risk of expiry or obsolescence. This method is particularly useful for perishable or fast-moving items.

Promoting a continuous flow of goods reduces downtime. This means better anticipation of demand, more dynamic assortment management and rapid liquidation of unsold goods.

Digitizing management with OMS/WMS

The use of a OMS (Order Management System) and a WMS (Warehouse Management System) enable real-time control of stock flows, and theautomation of numerous tasks: level updating, preparation scheduling, intelligent order routing.

This reduces human error, improves responsiveness and, above all, avoids shortages and overstocking thanks to better synchronization between actual demand and supply capacities.

Automate inventories and tracking

Manual inventory management is a major source of errors and losses. By automating inventories, using sensors, scanners or RFID, companies can reduce downtime, improve data reliability and optimize decision-making.

It also enables more precise traceability, essential for meeting regulatory or customer expectations in terms of quality and safety. A precise, permanent and connected inventory reduces uncertainties, and hence the need for overstocking.

Better forecasting of demand and supply

Today, data analysis is essential for a high-performance supply chain. Thanks to demand forecasting, companies can anticipate sales peaks, adjust their orders accordingly, and avoid building up unnecessary inventories.

It’s a collaborative effort between logistics, sales and finance. The quality of forecasts depends on the reliability of historical data, but also on taking into account external variables (promotions, trends, seasonality, etc.).

Shippingbo: a technological ally for controlling inventory costs

To meet these challenges, technological solutions like Shippingbo enable e-tailers and logisticians to centralize, automate and optimize their entire supply chain.

Real-time visibility for fine-tuned control

Thanks to its OMS, Shippingbo offers complete visibility of stock levels in real time, across all channels. This makes it possible to avoid stock-outs, better distribute stock between warehouses, and adjust restocking with agility.

Real-time control also reduces the margin of error in forecasts and limits the buffer effect of overstocking.

Automation to reduce errors and hidden costs

The Shippingbo WMS enables efficient management of picking locations, inbound and outbound flows, and automated order-picking operations. By reducing human intervention, companies gain in productivity, precision and peace of mind.

Picking or inventory errors can be costly: customer returns, repackaging, dissatisfaction… Automation eliminates this friction while streamlining operations.

Global optimization of logistics costs

Integrating a TMS (Transport Management System) allows us to go one step further by selecting the most competitive carriers and automating shipping-related tasks. In this way, Shippingbo acts not only on the cost of stockholding, but on logistics costs as a whole.

Case in point: an e-tailer specializing in home furnishings had an average of over €150,000 in dormant stock over the year. After implementing Shippingbo, it reduced its storage costs by 28% by improving its rotation and refining its forecasts.

Reducing inventory carrying costs is much more than a cost-cutting exercise. It’s a strategic approach that improves profitability, secures cash flow and strengthens competitiveness over the long term. By optimizing rotation, digitizing flow management and automating processes, companies gain agility and reliability throughout their supply chain.

Solutions like Shippingbo offer a concrete response to these challenges, providing visibility, automation and intelligent inventory management. These are all levers for transforming a cost center into a real performance driver.

Every inventory error is costly. What if you could avoid them right now? Discover our 5 tips for avoiding stock errors and maximizing the profitability of your operations.

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