Inventory Holding Costs: Calculation & Reduction Tips

Inventory holding costs are a common but often overlooked expense that can significantly impact your bottom line. These costs include everything from warehousing fees to insurance, depreciation, and lost opportunities tied to unsold stock. In this article, you’ll learn what inventory holding costs are, how to calculate them, where they typically apply, and how to reduce them with smarter storage strategies.

Inventory holding costs: what you need to know

Inventory holding costs, also known as carrying costs, represent the total expenses a business incurs for storing unsold inventory over time. These costs are a critical part of overall supply chain spending and can quickly eat into your profits if not monitored and controlled.

Holding costs include more than just rent or storage fees. They also cover insurance, warehouse labor, utilities, inventory shrinkage, product depreciation, spoilage, obsolescence, and even lost opportunity cost—the money you could’ve earned by using that storage space or capital more efficiently.

How to calculate inventory holding costs

There are different approaches to calculating inventory holding costs, ranging from a simple estimation to a more comprehensive breakdown. Below, we’ll walk through both the basic method (ideal for small businesses or startups) and a detailed formula that accounts for indirect costs like opportunity loss and depreciation.

Simple storage costs

The most basic way to calculate inventory holding cost is to focus only on direct storage fees, such as what you pay a warehouse or 3PL provider.

Example:

• A business uses a third-party logistics provider and pays for every pallet or shelf used.
• If they pay $2,000/month for storage, then their monthly holding cost is simply $2,000.

If a business runs its warehouse, the calculation is a bit more complex. You’ll need to factor in:

• Rent (only the portion used for storage)
• Utilities
• Security
• Storage equipment (like racking)

For example, if only 60% of the warehouse is used for inventory and the full rent is $5,000/month, then only $3,000 would count toward storage-related holding costs.

While simple, this method gives business owners a fast way to estimate storage costs and flag inefficiencies.

Detailed holding costs

A more advanced and accurate method of calculating inventory holding costs involves this formula:

Inventory Holding Cost = (Storage Costs + Employee Costs + Opportunity Costs + Depreciation Costs) / Total Annual Inventory Value

This approach provides a percentage that represents how much of your inventory’s value is being consumed by holding it. Here’s a breakdown of the four main cost categories:

• Storage Costs: Rent, utilities, insurance, and general facility maintenance.
• Employee Costs: Salaries and wages for warehouse workers managing inventory, receiving shipments, and fulfilling orders.
• Opportunity Costs: The potential profit lost by storing low-performing or overstocked products instead of items that could sell better.
• Depreciation Costs: The loss in inventory value over time due to aging, obsolescence, or wear and tear.

Example: 

Let’s say an art supply store carries three products: paintbrushes, easels, and canvases.

• Annual Inventory Value: $100,000
• Storage Costs: $20,000
• Employee Costs: $30,000
• Opportunity Cost: $15,000 (due to missing sales from understocked high-demand items)
• Depreciation: $10,000 (based on product life span and salvage value)

The inventory holding cost is calculated as:
Inventory Holding Cost = (20,000 + 30,000 + 15,000 + 10,000) / 100,000

Inventory Holding Cost = $75,000 / $100,000 = 75%

In this case, the business is spending 75% of its inventory value on holding costs, far above the healthy industry range of 20–30%. This suggests the store is overinvested in its inventory operations. Reducing holding costs through smarter inventory planning, demand forecasting, or outsourcing to logistics providers would be key to improving margins.

Common places you’ll see holding costs

Whether you’re leasing warehouse space or partnering with a logistics provider, understanding where and why these costs show up is essential to managing your operations efficiently. Here are three of the most common places where holding costs apply:

Warehousing facilities

Warehouses are large physical spaces used to store inventory in bulk. Business owners may choose to rent, purchase, or build these facilities based on their needs and long-term plans.

Holding costs in warehouses include monthly rent, electricity, security, and general upkeep. If your products require special care, such as temperature control or humidity regulation, these features can increase your expenses. Warehouses provide a high level of control and capacity but usually come with higher fixed costs.

Storage centers

Storage centers, also known as storage units or containers, offer a flexible option for growing businesses. These are smaller than warehouses and are often rented on a short-term basis.

They are useful when your inventory no longer fits at home or when your business is in a period of transition. While they may lack advanced features, such as climate control or staffing, they provide a practical way to manage overflow inventory. The costs depend on size, location, and any additional services you might need.

Fulfillment hubs

Fulfillment hubs are facilities operated by third-party logistics providers. They go beyond simple storage by also handling order processing, packing, and shipping for your business.

In this model, holding costs are often included as part of a broader service package. These centers use integrated systems and standardized processes to manage inventory across different locations. Fulfillment hubs are ideal for ecommerce businesses that want to scale without managing logistics on their own.

It is important to understand that fulfillment hubs are not the same as on-demand warehouse rentals. They are fully managed services designed to support consistent order fulfillment from start to finish.

Average inventory holding costs: what to expect

Inventory holding costs typically represent between 20 and 30 percent of a business’s total inventory cost. The rest is made up of the cost of goods sold and the cost of placing or replenishing orders. While this average is a helpful benchmark, your actual holding costs may vary based on your storage setup, business model, and product types. 

Several factors influence how high or low your holding costs might be:

• Warehouse location: Urban warehouses generally cost more due to higher rent and labor rates, while rural facilities may be more affordable but less accessible.
• Product size and weight: Larger or heavier items take up more space and may require special handling, increasing storage costs.
• SKU count: The more SKUs you manage, the more complex your storage needs become, leading to higher organizational and space costs.
• Inventory volume: Holding a year’s worth of inventory ties up more space and capital than storing just a month’s worth.
• Inventory turnover: Fast-selling products move through the warehouse quickly, reducing holding time and cost. Slow-moving items increase carrying costs and risk obsolescence.
• Order type: B2B orders with bulk shipments may require pallet-based storage, while DTC (direct-to-consumer) fulfillment involves more picking and packing labor per unit.
• Service level: Facilities that offer value-added services like inventory audits, packing, or real-time tracking often charge premium fees compared to basic storage-only facilities.

Tips to reduce holding costs

If you’ve managed storage in-house or worked with a logistics partner, applying these tips can help optimize your inventory, free up warehouse space, and reduce unnecessary expenses.

Optimize inventory levels to avoid overstocks

Carrying excess inventory takes up space, increases insurance and depreciation costs, and ties up working capital. To prevent overstocking, you need to maintain just the right balance between availability and efficiency. 

To improve inventory accuracy:

• Calculate safety stock, economic order quantities (EOQs), and reorder points for each SKU
• Refine your demand forecasting to better match customer trends
• Use an Inventory Management System (IMS) for real-time visibility into inventory movement and stock levels

Eliminate dead stock promptly

Dead stock refers to items that are outdated, damaged, or unsellable. Keeping them in storage only increases your holding costs without adding value.

To minimize the financial impact:

• Bundle or discount dead stock to recover part of your investment
• Offer slow-moving items as gifts to enhance customer experience
• Donate unsellable stock to charities for a potential tax benefit and warehouse space relief

Shorten inventory turnover times

Holding costs drop when your inventory sells quickly. The faster items move through your supply chain, the less time they sit on your shelves, collecting costs.

To increase turnover:

• Focus on stocking high-demand items with historically strong sell-through rates
• Consider smaller, more frequent orders to maintain leaner inventory
• Run promotions or flash sales to accelerate the sell-through of slower-moving SKUs

Maximize warehouse space utilization

Inefficient use of space can lead to higher rent, more clutter, and harder picking workflows. Optimizing your warehouse layout can help reduce space requirements and the associated costs.

To improve warehouse efficiency:

• Reorganize the layout using space-saving storage systems
• Choose racking based on product type (e.g., pallet racking, bin shelving)
• Design workflows that support faster picking and packing
• Or, outsource storage to a 3PL that offers professional space planning and optimization

Automate inventory and warehouse management processes

Manual tracking leads to mistakes, delays, and missed opportunities. Automating parts of your inventory workflow helps reduce human error and improve visibility.

With a robust IMS or WMS, you can:

• Receive automated low-stock alerts
• Track inventory from receiving to fulfillment in real time
• Route orders to the most efficient fulfillment center
• Reduce picking errors with automated route optimization

These tools not only reduce holding costs but also increase speed and accuracy across your operations.

Choose fair and transparent inventory storage solutions

Managing storage in-house can be time-consuming and expensive. Outsourcing to a logistics provider is often a more efficient way to reduce holding costs and gain flexibility.

Look for partners that offer:

• Clear, transparent pricing with no hidden fees
• Pay-as-you-go storage by volume or duration
• Access to software, integrations, and analytics tools
• Distributed fulfillment capabilities to reduce shipping time and cost

A trusted 3PL partner allows you to scale quickly while keeping costs under control, so you can focus on growth instead of warehouse operations.

What makes holding cost pricing fair?

Choosing a storage or warehousing solution with fair and transparent holding cost pricing is essential for long-term profitability. To evaluate whether a storage solution offers fair holding cost pricing, here are three important factors to look for:

Transparent fees with no surprises

Transparent pricing allows you to plan with confidence, manage budgets effectively, and avoid unpleasant surprises as you scale. If your provider adds unexpected fees month after month, that’s a red flag. Hidden charges can pile up quickly as your inventory grows, making it difficult to forecast your costs or protect your profit margins.

You should look for providers that:

• Offer clear, upfront pricing for storage, receiving, and fulfillment
• Use a flat-rate structure per bin, shelf, or pallet
• Bundle services like picking, packing, and labeling into one predictable fee

Pay only for what you store

Many businesses overspend on storage they don’t actually use. When managing your warehouse, you may end up paying for underutilized space, especially during slow seasons or early growth stages.

A fair solution should:

• Let you pay based on actual storage usage, not fixed overhead
• Adjust automatically as your inventory volume changes
• Provide optimized space management so you’re not wasting money on empty shelves
  

This flexible, pay-as-you-go approach ensures you’re only charged for the space your products physically occupy, which helps lower holding costs as your business fluctuates throughout the year.

Data-driven demand planning for smarter purchasing

Ordering too much of the wrong product leads to dead stock and long-term storage costs. On the other hand, under-ordering can result in stockouts and missed sales opportunities.

To reduce this risk, you need:

• Demand forecasting tools that analyze historical sales and seasonality
• Real-time insights into inventory turnover, sell-through rates, and stock levels
• Support for calculating key metrics like economic order quantity (EOQ) to balance purchasing with cost-efficiency

With the right technology, you can plan more accurately, purchase more strategically, and significantly reduce the financial strain of overstocking or poor inventory allocation.

Enhance your inventory management with Keys Logistics

At Keys Logistics, we provide intelligent inventory management solutions that help businesses streamline operations, reduce costs, and scale faster. Our advanced warehouse management systems are built to optimize every step of the supply chain, from inventory storage and real-time tracking to order fulfillment and shipping.

With strategically located warehouses in Ontario and other key distribution hubs, we offer faster delivery times and lower transportation costs. Moreover, our platform integrates effortlessly with leading sales channels such as Shopify, Amazon, eBay, and TikTok Shop, enabling real-time inventory synchronization, automated order routing, and greater accuracy in fulfillment. We also offer customized packaging, labeling, and shipping options to support brand consistency and unique business needs.

Backed by 24/7 customer support, Keys Logistics empowers you to manage inventory with confidence, delivering a seamless, scalable logistics experience that supports long-term growth in today’s fast-paced market.

Inventory holding costs: FAQ

Are holding costs and carrying costs the same?

Yes, inventory holding costs and carrying costs refer to the same concept. Both terms are used interchangeably and calculated using the same formula.

How do holding costs work?

Holding costs include all expenses tied to storing inventory, such as warehouse rent, labor, depreciation, and lost sales opportunities. These costs depend on your storage setup, location, inventory volume, and added services. To avoid surprises, choose providers that offer clear, transparent pricing with no hidden fees.

How can I calculate inventory holding costs?

Add up your storage costs, employee wages, depreciation, and opportunity costs. Then divide that total by the annual value of your inventory. The result, shown as a percentage, is your inventory holding cost.

Understanding and managing inventory holding costs is critical to improving profitability, optimizing storage space, and maintaining a lean supply chain. By accurately calculating holding costs and applying targeted strategies to reduce them, businesses can minimize waste, avoid overstocking, and improve overall efficiency. Whether you manage inventory in-house or work with a logistics partner, reducing holding costs is a key step toward building a more scalable and cost-effective operation.