When Inventory Carrying Costs Become an Expense

Originally posted March 4, 2022, updated December 4, 2025.

Whether a company is storing finished goods, raw materials, or components inside a warehouse, inventory carrying costs have a direct impact on profitability and long-term operational performance. Carrying inventory is part of doing business, but understanding when that cost becomes an expense matters just as much as knowing how to manage it.

When goods move through the supply chain, businesses incur inventory carrying costs at each stage: receiving, storage, handling, and order fulfillment. These costs accumulate regardless of whether the inventory is ultimately sold to customers or transferred to distributors.

So, when does inventory become an expense? Only when inventory is sold. Until that point, unsold inventory remains an asset on the balance sheet. The costs required to hold and manage that inventory (labor, storage, equipment, utilities, risk) remain carrying costs absorbed by the business.

For warehousing-heavy operations, tracking inventory carrying costs is essential for identifying waste, improving space utilization, and strengthening cash flow. Yet many companies struggle to distinguish which costs fall under daily operations versus true expenses, especially if they haven’t fully adopted a perpetual inventory management system.

What inventory carrying costs include

Inventory carrying costs represent everything required to hold and manage products inside a warehouse, distribution center, or storage facility. These costs reveal whether warehouse operations are running efficiently or whether hidden risks are inflating overhead.

Carrying costs typically fall into four categories:

Capital costs

Capital costs include the money invested in purchasing inventory, raw materials, or components. They also include the cost of capital itself: loan interest, financing charges, and opportunity cost. According to APQC, capital costs often represent the largest share of total carrying costs, frequently exceeding 50%.

Inventory service costs

These are costs tied to managing inventory inside the warehouse: inventory control labor, taxes, insurance, and warehouse equipment or technology.

Inventory risk costs

Risk costs represent anything that could reduce the value of inventory. These include depreciation, product damage, obsolescence, shrink, inaccurate records, and excess dwell time. As an example, The National Retail Federation estimates retail shrink at 1.6% of inventory, costing U.S. businesses $112 billion annually.

Inventory space costs

Space costs are the price of occupying warehouse real estate, including lease or mortgage payments, racking, utilities, security, and building maintenance. These costs fluctuate based on market demand, seasonality, and storage requirements.

How to calculate inventory carrying costs

To understand the percentage of inventory cost consumed by holding stock, companies use this standard formula:

1. Add all carrying cost categories:
   Capital + service + risk + space
2. Calculate total inventory value:
   Unit cost × total units in stock
3. Divide carrying costs by inventory value and multiply by 100:
   (Carrying cost ÷ inventory value) × 100

According to CSCMP supply chain management principles and practices, most companies aim for inventory carrying costs between 15% and 30% of total inventory value. However, this range varies by industry, storage requirements, and market volatility.

Ways to minimize inventory carrying costs

Carrying costs will never reach zero, but a strong warehouse strategy and reliable 3PL partnerships can keep them controlled without compromising service.

• Reorder point alignment: Understanding when to replenish stock (and in what quantities) prevents overordering, improves cash flow, and reduces excess dwell time. Demand forecasting tools make reorder points more accurate and responsive to real conditions.
• Minimum order quantity management: Suppliers often set minimum order quantities (MOQs). Businesses may be able to renegotiate lower MOQs in exchange for more frequent orders, improving turnover and reducing space costs.
• Overstock prevention: Bulk-buying discounts can appear attractive, but excess inventory ties up capital and increases risk. Right-sizing purchase decisions based on actual consumption prevents unnecessary holding costs.
• Eliminate deadstock: Deadstock, which is inventory that will never sell, creates direct waste. Adjust forecasting, reassess SKU performance, and explore vendor returns, donations, or discount bundling to recapture value.
• Improve supplier lead times: Faster, more reliable supplier lead times reduce the need to carry safety stock. Shorter lead times enhance turnover rates, helping companies avoid excess labor and storage associated with long-term holding.

The WSI difference

Understanding how inventory flows through a warehouse and what it costs to hold it is essential to managing total logistics spend. WSI combines decades of warehousing expertise, nationwide capacity, and modern inventory management systems to help companies reduce waste, optimize space, and protect profitability.

With strong operational discipline and a commitment to customer-focused solutions, WSI helps manufacturers, distributors, and industrial shippers improve their inventory strategies across the entire storage lifecycle.

To learn how WSI can help lower inventory carrying costs across your warehousing network, contact the team today.