A Detailed Look Into Inventory Holding Costs
Logisticians around the world, let alone in the UK, often find themselves scratching their heads, looking for a reliable and an easy way of measuring the inventory holding costs . This holding cost is instrumental in determining the total cost of goods sold.
In this article, we will look at what inventory costs are, how they are calculated, their impact on financial statements, and whether forward-buying inventory as Brexit implications come forth is a good idea or not.
Inventory Holding Costs
This is a largely unavoidable cost of any product-based business. Poor optimization of inventory holding costs can result in poor inventory turnover, or in other words, you end up having more inventory than sales; not to mention your storage costs start racking up, too.
Many storage and on-demand warehousing solutions, such as LogistCompare, offer WMS (warehouse management system) integration solutions that allow you to keep track of your inventory holding costs so that you can make reliable inventory forecasts on the go.
What Is Inventory Holding Cost?
Inventory holding costs are costs associated with storing inventory that hasn’t been sold throughout the year and are combined with other inventory-related costs, such as the administrative, ordering, shortage, and other costs.
Inventory holding cost is the sum of at least the following:
> Warehousing costs
> Labour for proper storage
> Maintenance costs
> Normal loss
> Cost of upgrading obsolete inventory
> Opportunity costs
A simple formula of calculating the inventory holding costs is:
> C = Capital
> T= Taxes
> I= Insurance
> W= Warehouse costs
> S= Scrap
> O = Obsolescence costs
> R1= Recovery costs (year 1)
It is important to note that inventory storage costs, or warehousing costs, can either be tangible or intangible. Inventory holding costs are also referred to as carrying costs when expressed as a percentage of the total cost of goods.
Here is a formula for the same:
Example of Inventory Holding/Carrying Cost
Let’s say a company with its head office in London has an average annual inventory value of £5 million. By year-end 2021, it has some inventory in store. The company gets in touch with all its warehouses in the UK and asks them to give them an inventory count.
Once calculated, it finds out that inventory costing £250,000 is still left unsold. After adding the cost of storage (from the time it was stored till now), any obsolescence cost, administrative costs, taxes paid, insurance premiums paid for the inventory, losses (scrap), and opportunity costs (recovery). The sum of all these costs would give the company its inventory holding cost.
When the same is divided by the average annual inventory costs, you would get its inventory’s carrying cost. Usually, carrying costs amount to 20%-30% of the total cost of inventory, but can vary from industry to industry.
How we can help you!
If you’re looking for a way to ensure minimum inventory holding costs via a cost-effective and reliable warehousing solution provider, you should consider an on-demand warehouse. These warehouses offer flexible storage options that scale with how much inventory you have stored.
To learn more about the same, give us a call and we’ll be happy to clarify anything you need help with!