Holding costs are expenses to store and hold inventory in a warehouse until it’s sold to the consumer. Also called carrying costs, holding costs are an important metric related to total inventory costs — right along with ordering costs and shortage costs. A company’s inventory holding costs typically include fees for storage space, labor, and insurance. Minimizing unsold inventory (and therefore, your holding costs) is a critical part of any warehousing or supply chain management strategy.
Holding costs are commonly expressed as a percentage of the total inventory value during a set period of time. Brands rely on holding costs to determine how much profit they're making from their inventory, and to check how long they can store unsold inventory before they start losing money on it. In addition, holding costs communicate the amount of inventory to be bought or sold in order to maintain inventory levels, support inventory control, and enhance profitability.
To calculate your own holding costs, use the formula:
Holding cost (%) = [inventory holding sum ÷ total value of inventory] x 100
Here, ‘inventory holding sum’ refers to the four elements that make up your holding cost: capital costs, inventory service costs, inventory risk costs, and storage costs.
Imagine you own a candle company that stores its unsold inventory in a warehouse location. The total value of your candle inventory amounts to $50,000. Your inventory service costs, capital costs, storage space costs, and inventory risks amount to $10,000. Using these numbers, you can quickly calculate your holding cost, since you know your inventory holding sum equals $10,000. The applied formula looks like: [$10,000 ÷ $50,000] x 100, and therefore, your candle brand has a holding cost of 20% of its total inventory value.