What is inventory carrying cost for a distributor, and how do you estimate it?
Nov 7, 2026 · 3 min read
Inventory carrying cost is what it costs per year to hold stock, as a percent of its value. It includes the cost of capital, warehouse space, handling, insurance and taxes, shrink and obsolescence. Many distributors use 20 to 30 percent a year. Go lower for cheap capital and fast movers, higher for slow or easily outdated stock.
What goes into it
Here's an example build-up for a fictional distributor. Your numbers will differ. The point is to see where the cost comes from.
| Component | Example rate | Where it comes from |
|---|---|---|
| Cost of capital | 8% | Interest on your line of credit, or what the cash would earn elsewhere |
| Space | 5% | Warehouse rent, utilities, racking |
| Handling | 3% | Labor to receive, put away, count and move it |
| Insurance and taxes | 2% | Coverage on inventory, plus inventory taxes where they apply |
| Shrink and damage | 2% | Theft, breakage, miscounts |
| Obsolescence | 5% | Stock that ages out, gets superseded or has to be marked down |
| Total | 25% |
Turning it into dollars
Carrying cost is usually quoted per year. To use it on a specific purchase:
Hold that $200K for six months and it costs about $25,000. That's real money even though it never shows up as one line on the P&L. It's spread across interest, payroll, rent and year-end inventory adjustments.
Where it matters most
Rebate tier pushes. Buying extra to hit a tier earns a rebate you can see. The carrying cost is spread out and easy to ignore. Comparing the two is the whole point of the break-even formula.
Forward buys. Same math when buying ahead of a price increase. The savings have to beat the months of carrying cost.
Slow movers. A SKU that turns once a year carries a full year of cost on every unit. That's often bigger than the margin.
When to adjust the rate
- Go lower when you're cash-rich, the warehouse has room and the product is a steady seller that doesn't age.
- Go higher when you're borrowing at a high rate, space is tight, or the product changes models often or is bulky to store.
Common questions
Is 25 percent a reasonable carrying cost for a distributor?
It's a common rule of thumb and a reasonable default if you haven't calculated your own. Your actual number depends mostly on your borrowing rate and how fast the product turns.
How do I convert annual carrying cost to monthly?
Divide by 12. At 25 percent a year, holding $200,000 of extra stock costs about $4,167 a month.
Should I use the full carrying cost for a one-time purchase?
Use the parts that actually change. Cost of capital always applies. Space only matters if you're near capacity. Obsolescence depends on the product. For a quick check, the full rate is a conservative choice.
Run your own numbers. The tier break-even calculator is free, needs no signup and works on your phone.