By Safock Procurement Research Team6 min read
A restaurant group keeps about $28,000 of stock in each of its 24 restaurants: $672,000 across the group. Holding it costs about $201,600 a year, or $552 every day, before a single plate is sold.
A common shortcut is to count only the cost of money: the 8% the cash could earn or costs to borrow. For this group, that covers just over a quarter of the real cost, and the biggest single part is food that goes off before it is used.
Every unit on a shelf costs something for as long as it sits there. Those costs are usually expressed as a yearly percentage of the average value of stock held, so they can be added together:
| Component | What it covers |
|---|---|
| Cost of capital | What the cash tied up in stock costs to borrow, or could earn elsewhere |
| Storage space | Rent, utilities and refrigeration for stockrooms, walk-ins and stores |
| Handling and counting | Staff time to put stock away, rotate it and count it |
| Insurance and taxes | Cover on stock value, plus inventory taxes where they apply |
| Shrinkage and theft | Stock that disappears or is damaged |
| Spoilage and obsolescence | Stock that expires, goes off, or is no longer used |
Carrying cost rate = sum of the components, % per year
Yearly carrying cost = average inventory value × carrying cost rate
The Inventory Carrying Cost Calculator's restaurant preset, for 24 restaurants holding $28,000 of stock each:
| Component | Rate | Cost a year |
|---|---|---|
| Spoilage and obsolescence | 9% | $60,480 |
| Cost of capital | 8% | $53,760 |
| Storage space | 6% | $40,320 |
| Handling and counting | 3% | $20,160 |
| Shrinkage and theft | 2.5% | $16,800 |
| Insurance and taxes | 1.5% | $10,080 |
| Total | 30% | $201,600 |
That is $8,400 per restaurant a year, or $552 a day across the group.
Spoilage tops the list. Produce, dairy and proteins have short lives, and every case that goes off is a full loss of its value. Spoilage is also the part a kitchen controls most directly, through what it orders and how it rotates stock.
The same six components give different rates for different businesses. The calculator's four presets:
| Business | Stock | Rate | Cost a year | Biggest part |
|---|---|---|---|---|
| Restaurant group, 24 sites | $672,000 | 30% | $201,600 | Spoilage (9%) |
| Health system, 6 facilities | $8,400,000 | 23.5% | $1,974,000 | Cost of capital (8%) |
| Construction firm, 8 yards and sites | $5,200,000 | 22.5% | $1,170,000 | Cost of capital (8%) |
| Other multi-site business, 10 sites | $2,500,000 | 23% | $575,000 | Cost of capital (8%) |
You'll often see 20% to 30% quoted as a typical carrying cost rate. These presets sit inside that range, but for different reasons, and your own mix of components can sit well outside it. A restaurant group with poor rotation could run spoilage at 15%, pushing its rate to 36%. A business holding stable spare parts might sit well under 20%.
For each preset, here is what the cost of capital alone (8%) would suggest, against the full rate:
| Business | Capital only | Full carrying cost | Understated by |
|---|---|---|---|
| Restaurant group | $53,760 | $201,600 | 3.75× |
| Health system | $672,000 | $1,974,000 | 2.94× |
| Construction firm | $416,000 | $1,170,000 | 2.81× |
| Other multi-site | $200,000 | $575,000 | 2.88× |
Using only the cost of capital makes stock look cheap to hold. That pushes decisions toward bigger orders and higher pars than the business can afford.
Reducing average inventory has two effects, and they're worth keeping apart:
| Reduction | Cash freed once | Saved every year |
|---|---|---|
| 10% | $67,200 | $20,160 |
| 15% | $100,800 | $30,240 |
| 25% | $168,000 | $50,400 |
The usual ways to get there are right-sized par levels, more frequent deliveries, and moving slow stock to the sites that use it before it expires.
Pick a business type, set your sites and stock, and replace each component with your own figure. The defaults are the restaurant group.
Your carrying cost · same maths as the full calculator
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Inventory Carrying Cost Calculator
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The yearly cost of holding stock, usually expressed as a percentage of average inventory value. It adds up the cost of the money tied up, storage space, handling and counting, insurance and taxes, shrinkage and theft, and stock that spoils or goes obsolete.
Estimate each component as a yearly percentage of average inventory value and add them up to get the carrying cost rate. Multiply the rate by average inventory value to get the yearly cost. For $672,000 of stock at 30%, that is $201,600 a year.
Figures of 20% to 30% a year are widely quoted, but the rate depends heavily on what you stock. Perishable stock carries a high spoilage cost; stable parts carry little. Build your own rate from the components rather than borrowing an average.
No. The cost of capital, what the money tied up in stock could earn or costs to borrow, is only one part. Storage, handling, insurance, shrinkage and spoilage are added to it. In the restaurant example in this guide, the cost of capital alone would understate the carrying cost by a factor of 3.75.
It is the holding cost in the economic order quantity formula. A higher carrying cost rate favours smaller, more frequent orders; a lower one favours larger orders, especially when suppliers offer price breaks.