www.industryarchive.org - B2B Resources & Solutions Community for B2B Professionals
Cheever Specialty Paper & Film Wholesaler Durable Goods

Paper Industry Cost of Holding Inventory Calculation

By: Jeff Ell

Paper Industry Cost of Holding Inventory Calculation

How to calculate, evaluate and understand the costs associated with holding physical inventory. 

Over 90% of the time when working with our customers, the concern around how to handle inventory is usually a last minute issue before finalizing the purchase. We have found a lot of misunderstanding regarding Inventory holding costs by a wide percentage of people in the Paper industry. 

Understanding Your Inventory Holding Cost

There are a number of cost drivers in holding inventory and sometimes even more important, the cost of not having enough inventory on hand. Below we put together the facts around this calculation.
Each company is different but on average your inventory holding cost will be anywhere from 25% to 40% on the inventory value on hand. If you have $500,000 in inventory, your yearly inventory cost will range from $125,000 - $200,000. Most companies settle in the range of 30% - 35% a year. This said companies will typically apply a standard 3% “monthly” holding cost. Below is a quick example of what these numbers would look like with an inventory value of $500,000. The yearly cost of Inventory comes to $190,000.

Keep in mind these are averages. It is important that you track your own inventory costs. This is where most companies fall down on. Tracking these costs (see below) is time-consuming, requires all levels of a management buy-in and is often not, the most glamorous of work. Every company should attempt to complete these costs. We have heard feedbacks from customers on how eye opening the process was in the fact that they just had no idea they were spending that amount of money at a particular cost. If you were thinking of taking on a summer project, this is your time to hire that intern and make this one happen.

Actual Inventory Costs

Here is the list of costs that go into figuring out your Inventory Costs.

  1. Cost of Capital: 5% - The cost of financing money and your companies cost of money
  2. Destroyed Inventory: 3% - Inventory that is unable saleable due to damage, poor handling, not packaged securely. Destroyed product is your own people causing the damage

  3. Damaged Inventory: 7% - Statistics show, the more your inventory is handled, the more it is at risk to be damaged. Moving slow inventory to a different part of your warehouse, not having enough staff or the proper forklift to handle your product all adds to damaged goods.

  4. Obsolete & Outdated Inventory: 3% - The cost of inventory that is outdated, obsolete, expired, the only option is for scrapping or a discounter.

  5. Theft: 4% - Depending on your industry, this may be a major one. In this cost is the money spent on theft prevention as well – closed caption security cameras, security guards, software and personnel to monitor and maintain these systems. And of course, the actual cost of stolen inventory or theft.

  6. Electricity Cost: 3% - The electricity heating and cooling needed for this warehouse space

  7. Lost Customers: 3% - The cost associated with losing a customer due to not having sufficient inventory on hand. This is one of the hardest to put a number, and almost no one tracks this number. You want to see an eye opener at your next quarterly sales meeting, show these costs. Well, worth the time and effort on this one.

  8. Freight Costs: 7% - Not having inventory on hand you will often “rush” or expedite you to get products necessary to making your product. As well as keeping inventory too low, you will expedite orders to customers to meet their deadlines.

  9. Overtime: 3% - When you pay your staff overtime to ship and receive the product in or out due to not having the correct levels of inventory. This happens when you just get the product in and you need it shipped and packed the next day for a customer, thus having to pay overtime to have a warehouse person stay late so it can be ready for a 7:00 AM pickup.

The example below will be different for your company no doubt. The point is we want to get you thinking about these costs. You can achieve significant cost savings by investing in this exercise. Everyone has a cost of inventory – do you know what yours is? Contact us to get your free inventory cost calculator now.

Monthly Value of Inventory Example

Contact Sponsor