Inventory Carrying Cost
Definition
The total cost of holding inventory over time, including storage, insurance, obsolescence, spoilage and the capital tied up. It is a key input to order-quantity and stocking decisions.
Related Terms in Purchasing & Inventory
Stockout
Running out of an item so that demand cannot be met from stock. Stockouts cost lost sales and can damage customer trust, which is why businesses hold safety stock and track reorder points.
Dead Stock
Inventory that has not sold and is unlikely to sell, tying up cash and storage space. Identifying dead stock lets a business clear it through discounts or write it off.
ABC Analysis
A method of classifying inventory into categories A, B and C by value and importance, so management attention and controls focus on the small share of items that drive most of the value.
Just-in-Time (JIT) Inventory
An approach that keeps inventory to a minimum by receiving goods only as they are needed for production or sale. It cuts carrying cost but relies on reliable suppliers and demand.
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