Supply Chain

Carrying Cost: The Number Nobody Puts in the Inventory Decision

Carrying cost is quoted as a round percentage that nobody derived. Build it from its parts against today's cost of capital and the inventory argument changes shape.

Inventory carrying cost is the most frequently quoted and least frequently derived number in supply chain. Somebody says 25%, everyone nods, and the figure propagates into safety stock models and order quantity calculations that then produce answers nobody can defend. The honest version is built from components, and the largest of them moves with the cost of capital, which means a carrying cost calculated in a cheap-money era is wrong now.

Start with capital, because it moved

The capital component is what the money tied up in inventory would otherwise earn or what it costs to borrow. The bank prime loan rate currently stands at 6.75% (Aug 6, 2026), and for most manufacturers borrowing costs sit at or above that. Use your actual weighted cost of capital if you have it. The point is that this component alone has moved by several percentage points in recent years, and any carrying cost assumption inherited from an older model is understating the true figure by roughly that difference.

The non-capital components, itemized

Derive each from your own accounts

• Space: warehouse rent or opportunity cost of the floor, plus racking, lighting, heating, and handling equipment attributable to storage.
• Obsolescence and shrink: historical write-offs as a share of average inventory value, which is a number your general ledger already contains.
• Insurance and taxes on inventory value, which vary considerably by jurisdiction.
• Handling: the labor of moving, counting, and cycle-counting stock that is not moving toward a customer.

Put those together. On $2,000,000 of average inventory, capital at the current prime of 6.75% plus a stated 12% for space, obsolescence, insurance, and handling gives a total near 18.8%, or roughly $375,000 a year. The 12% is an illustrative placeholder for the non-capital stack and should be replaced with your own figures; the capital component is the one this site tracks live.

• Prime rate, Aug 6, 2026: 6.75%
• Illustrative total carrying rate: 18.8%
• Annual cost on $2,000,000 of stock: $375,000

A carrying cost inherited from a cheap-money era understates the case for lean inventory by exactly the amount rates have moved.

What changes once the number is right

Carrying cost is an input to economic order quantity, safety stock, and every make-versus-buy decision involving stocking. Raising it lowers optimal order quantities, tightens safety stock, and makes local sourcing with short lead times look better against cheaper distant sourcing that requires holding more. Those conclusions all follow arithmetically from the input, which is precisely why the input deserves more scrutiny than a round number repeated from a textbook.

Use the carrying cost calculator to assemble the components against your own cost of capital. Build your carrying rate

Published 2026-08-08.