What is holding cost?
Holding cost is what it costs to keep stock until it sells: the money tied up in it, storage, insurance, handling, and the risk of it being damaged, going out of date or becoming obsolete.
It is also called the carrying cost of inventory, and it is easy to underestimate because most of it never appears on a single invoice.
Holding cost formula
Inventory holding cost is usually expressed as a percentage of average inventory value per year:
Annual holding cost = average inventory value × holding cost rate
A rate of 20 to 30% a year is a common starting assumption, built from the cost of capital, storage, insurance, shrinkage and obsolescence. With $120,000 of average inventory and a 25% rate, holding stock costs about $30,000 a year.
What holding cost includes
- Capital cost: what the cash tied up in stock could earn or save elsewhere.
- Storage: rent, utilities and warehouse staff.
- Insurance and taxes on inventory.
- Shrinkage, damage and obsolescence.
Holding cost vs ordering cost
Ordering cost is the fixed cost of placing and receiving an order: admin time, delivery fees, inspection. Ordering more often keeps less stock on hand and lowers holding cost, but raises ordering cost. The economic order quantity is the order size that balances the two.
How to reduce holding costs
- Cut safety stock on slow movers where a stockout costs little.
- Order smaller quantities more often for items that are expensive to hold.
- Clear dead stock rather than paying to store it for another year.
- Use ABC analysis to focus on the items that tie up the most cash.
Last reviewed 2026-11-01.