What is carrying cost?

Inventory costs money just by sitting there. Carrying cost adds up the components: the capital tied up in stock (money that could be earning or paying down debt), warehouse space and utilities, insurance and taxes on the goods, shrinkage, and the obsolescence risk that some of it will never sell at full value. Industry rules of thumb put the total at 20% to 30% of inventory value per year, which means a shelf holding $200,000 of stock costs roughly $40,000 to $60,000 annually to keep full. That number reframes decisions that look free. The "bargain" bulk buy that saves 8% on unit price but sits for fourteen months loses the savings to carrying cost before it sells through. The slow-moving SKU kept "just in case" has an annual rent. The aisle of dead stock isn't neutral; it's a recurring charge. Carrying cost is also half of the EOQ trade-off, pulling toward smaller, more frequent orders while ordering costs pull toward larger ones. You don't need a precise figure to use it; even a rough 25% assumption makes overstock conversations concrete. Where teams trip: counting only the visible costs (rent, insurance) and ignoring cost of capital and obsolescence, which are usually the two largest components and the two easiest to wave away.