Businesses frequently pay inventory holding costs when keeping items at a warehouse. Learn how to determine your eCommerce inventory holding cost as well as the typical cost of holding expenses in this post.
What are inventory holding costs?
The total expense of keeping unsold goods on hand is referred to as inventory holding costs. Inventory holding costs are calculated as a percentage of total inventory costs within a particular supply chain.
There include expenses for storage, insurance, labor, transportation, depreciation, inventory shrinkage, damaged or spoilt goods, obsolescence, and opportunity costs.
How to calculate your eCommerce inventory holding cost
Determine your storage, personnel salaries, inventory depreciation, and opportunity expenses before calculating your eCommerce inventory holding cost. Divide the total of these sums by the yearly inventory value to obtain the total. Your inventory holding cost is the resulting value stated as a percentage.
Simple storage costs
The simplest definition of inventory holding costs is that they are just the expenses of keeping stock. Although this is oversimplified and doesn’t fully explain the situation, it offers retailers a helpful place to start and may inspire fresh ideas for approaching inventory costs.
Detailed holding costs
A method that considers storage, personnel, opportunity, and depreciation expenses provides a more thorough way to determine the eCommerce inventory holding cost.
The holding cost formula is ultimately stated as a percentage of the overall worth of your inventory. It is as follows:
Inventory Holding Cost = (Storage costs + Employee salaries + Opportunity costs + Depreciation costs) / Total value of annual inventory.
- Storage expenses cover all expenses related to keeping your goods in a physical location, including rent for warehousing or storage, utilities, and insurance.
- Salaries or pay for warehouse staff who manage and audit inventory, process orders, and maintain the facility make up the majority of personnel expenditures.
- The expense of retaining dead stock as opposed to other, more profitable items is known as an opportunity cost.
- Depreciation costs, which are also intangible, are the expenses spent as the value of your inventory deteriorates over time and as things become more and more out-of-date.
Subtotals should be calculated, totaled, and the result divided by the value of your annual inventory (the combined average value of all inventory you move in a year).
How much are holding costs on average?
Typically, holding costs account for 20% to 30% of a company’s overall cost of inventory, with the cost of goods sold and ordering expenses accounting for the remaining 70% to 80%.
eCommerce inventory holding cost can vary significantly based on a number of variables, including:
- The warehouse’s location – Including whether it is in a city or a rural region.
- The dimensions of the things being stored – It may be more expensive to store large or even heavy items compared to small items.
- Your SKU count – The more things you sell, the more storage space you’ll need and the more money you’ll spend.
- The volume of stuff you have stored, whether it takes up a year or a month.
- How rapidly inventory passes to the buyer or sells through – Depending on whether it’s a hot item that spends little time in the warehouse or a slow-moving item that gathers dust.
- What kinds of orders you receive – DTC with few units per order or B2B that requires high pallet storage.
- If the facility offers other services for a fee or is only used for storage.
The long-term success of your company depends on finding an inventory storage solution with reasonable holding costs, yet the cheapest storage option isn’t necessarily the greatest option for your company. In other words, what works well for one company won’t always work for another. Contact us today to work with our experts in the eCommerce inventory holding cost and storage in general, and find the best solution for your business.