# Inventory Carrying Cost Calculator

Use this FREE calculator to calculate and demonstrate the real costs of inventory.  For most companies, Lean Manufacturing principles allow for the reduction of inventory by 20-40%.  This can have a dramatic impact on cash and space generation.

A detailed explanation for each field is below.

Current Inventory \$:   Input your current total inventory (dollars)

Carrying Cost of Inventory %:   Input your annual carrying cost percentage.   Carrying costs are typically between 24% to 48% per year.

If you don’t know your Inventory Carrying Cost, the following will assist you in calculating it.   An explanation for each item is below the chart.

Inventory Carrying Costs typically include the following components:

1)   Cost of Capital:   Your blended cost of corporate equity and debt financing.   Manufacturing companies are generally between 7 – 12%
2)   Cost of Space:   The cost of the space (and utilities) tied up holding inventory.   The text books say 2-5%
3)   Administrative Costs:   People and systems costs required to manage the inventory.   It includes warehouse supervision, cycle counting, inventory transaction processing, etc.   3-6%
4)   Obsolescence and Deterioration:   Scrap and rework costs of inventory that is no longer “active”:   Customer cancelation, product design change, damage and corrosion, etc.
5)   Insurance / Taxes:   3-9%
6)   Material Handling:   With lots of inventory we are always moving something to get to the item we actually need.   2-5%   Some companies also add the costs of all stock keeping, i.e. the cost of putting up and picking material.
7)   The Impact on Quality:   The more inventory, the more handling damage, scrap, sorting, and rework required.   And inventory delays discovery, thereby making it more difficult to uncover the real root cause.
8)   Lead Time:   There is a correlation between WIP inventory and response time:   The more items in WIP, the longer it takes to move an item through.   This can have a negative impact on market share / price due to competitive disadvantage in responsiveness.
9)   Shrinkage:   The cost of misplaced, lost, or stolen material / parts.
10)   Opportunity Costs:   What could we have earned if we had invested this money?
11)   Innovation Delay:   Time to Market is critical today.   Inventory of old parts or finished goods can delay new product introduction while we wait to use up the old parts before implementing the new design.

Inventory Reduction Goal %:   Input the percentage reduction that you are targeting.   Typically, a reduction of 20-40% is reasonable.   If you would like a more exact estimate, give us a call.

“Cost of Delay (Months)” is intended to help you get people off dead center.  Input the number of months that you have been discussing the transition to lean, but have not done anything substantial (corporate wide).   The calculated number represents the carrying cost on the postponed inventory reduction for that period.  For example, at the default values of \$5 mil inventory, and a 40% reduction target, the inventory reduction would equal \$2 mil.   24% carrying cost = 2%/month.   At 24 months the total cost of delay equals \$2 mil * 2% * 24 mo’s = \$960,000!

The “Estimated Cash Windfall \$” is the amount of tax-free cash that will result from the targeted inventory reduction.
Our unique process generates large amounts of up-front cash.   A Lean Transition should not only be self funding.   It should be a significant net cash generator!
Note: We have had three clients, to date, that have generated in excess of \$150 million in tax free cash within the first eighteen months of kickoff.

“Inventory Carrying Cost Per”  Select a time period and the calculator will show the actual cost for the period chosen, based on your set of values.   It was purposely designed to look like the national debt clock to show the cost impact of delay.   The amount will increase each second.

Change the parameters as you see fit, then hit the “calculate” button to reflect the new results.

NOTE:   If you are less than thrilled with your Lean Manufacturing results to date, you might want to check out our “Lean Bench Marking” article.   This is what you SHOULD EXPECT in the first 9-12 months!

We’ve got a track record of continuing dramatic bottom-line successes since 1988!   Drop us a note, or give us a call.   There is no charge for a discussion and I guarantee you won’t be disappointed.

## 8 replies on “Inventory Carrying Cost Calculator”

[…] and now there is an website with a real-time Inventory Cost Calculator developed by the Hands On Group which can show management the real cost of the inventory they are holding. The online calculator […]

s r krishnansays:

But can we consider variable to be added to this calculator to include the minimum inventory to be kept in terms of weeks and the calculation modified it would probably be more realistic from the Inventory controller ‘s views .
s r krishnan

Jacksays:

Hi S R
If I’m understanding your inquiry correctly, you are looking for a means to calculate minimum inventory levels. Is that correct?
I don’t think we can help you there. There is no “minimum” inventory level, except zero. Literally “just in time” deliveries, single piece flow of internally generated parts, consignment vendor material held on site, … These are examples of virtual zero inventory.
As for weeks of inventory calculation, for now you’ll need to do the math yourself for your unique circumstance.
However, I don’t see any reason that we couldn’t add a few more fields for cost of sales and such, and have the calculator compute your days/weeks on hand as well as turns.
Check back in a month or two. We might just add those features.
Thanks for the suggestion.
Jack

Andrew Jordansays:

What I don’t see and what I was taught, is now you have the money, how much return will you get by investing it into the business rather than dusty inventory?
Another 20% on top of these figures? I mean you aren’t going to put in the mattress are you?

Jacksays:

Excellent observation Andrew! You are, of course, correct. In addition to saving the “cost, you should attain an additional return on your capital.
I’ll let you choose what rate of return you think is reasonable.

Have you worked with large health care systems in determining their inventory carring rate for their pharmacies. Typically a large hospital will have \$1.0 to 2.0 million on hand in their pharmacy.

Jacksays:

Excellent observation Andrew! You are, of course, correct. In addition to saving the “cost, you should attain an additional return on your capital.
I’ll let you choose what rate of return you think is reasonable.

Jacksays:

Robert,
This is a real area of opportunity. The long range challenge is to get the entire hospital supply chain more responsive. In the short term, we have found that there is a considerable amount of excess / obsolete (E & O) inventory. Our typical first step is to do a “slice and dice” of the inventory to calculate days of supply. Then go after the low hanging fruit.
Another tremendous opportunity is in the movement of time-sensative drugs (MOST fall into this category). We want to assure that the hospital is on a rigorous FIFO inventory control system, and carefully tracks all expiration dates.