What is paid to the supplier is only part of the true cost of holding stock. Businesses that purchase stock, both for production and direct re-sale, will be familiar with the term ‘carrying cost’, which is the sum of:

  • Purchasing the stock
  • Warehousing
  • Handling/delivery
  • Damage and loss

Purchasing the Stock

There are many hidden costs with purchasing stock. The more obvious ones are missing out on economies of scale by not ordering in bulk or far enough in advance. The opposite, which can have an equally negative impact is purchasing more stock than needed to avail of a special rate.

Less obvious costs may include finance charges and opportunity costs. This is either the interest charged on finance borrowed to purchase the stock or the investment opportunities missed because money is tied up in under-performing inventory.


Stock needs a shelf to sit on and it doesn’t get there by itself. Whether you own or lease a premises, mortgage/rent, insurance, electricity, heating and security are just some of the typical costs you are guaranteed to have, as well as furnishings and equipment for moving stock. If your product requires specialist storage, such as refrigeration, the cost may be greater.

Warehousing costs increase with area size, so it makes sense to only store what is needed for the foreseeable future.

Handling and Delivery

A poor warehouse layout reduces productivity. Identifying fast moving stock and storing it at easily accessible locations will reduce unnecessary internal transport, people movement and repetitive tasks.

Likewise, inefficient use of warehouse space and shelving may result in a bigger area being needed.

Damage and Loss

The longer that stock is held, the greater the risk of depreciation or becoming obsolete. Accurate calculation when ordering is vital for reducing the risk of deterioration of stock.

For accountancy purposes, ‘carrying cost’ is broadly accepted as being fixed at a percentage of stock value, that nothing can be done about. However, smarter stock management enables businesses to reduce these costs and significantly impact the bottom line.

Implementing a stock management process eliminates excessive, obsolete, or underperforming stock that is wasting money. It also ensures that in-demand items are sufficiently stocked so that sales can be completed promptly and cost effectively.

Download our ebook to learn some of the best practices for achieving purchasing efficiencies through better stock management, involving all relevant departments in the process.

Businesses that don’t operate a sales order process, such as shops and rental companies, must hold a ‘safety stock’ to meet unpredicted sales and exchanges.

A business that successfully manages its safety stock should never lose a sale because they don’t have an item. Having a lot of ‘out of stock’ products appears unreliable to potential customers.

So without the foresight of a sales pipeline, how is a minimum stock threshold determined?

Supplier Delivery Time

The length of time it takes for a product to reach your business from the supplier is the most important factor to consider. The safety stock must be adequate to meet sales during this time. It is not sufficient to allow stock to run out before re-ordering.

Estimating Sales

The next step in establishing a minimum stock threshold is establishing customers’ average purchases during the supplier delivery time.

There is a challenge to hold enough stock to cover suppliers’ delivery times that is sufficient enough to meet customers’ demand but not too great that it affects gross profit because of high carrying costs.


Let’s say that a supplier has a delivery time of 8 working days. The business knows that on average, it sells 220 units of their product per month. If there are 22 working days in the month, then the safety stock should be at least:

220 units / 22 days = 10 units per day X 8 days delivery time = 80 units safety stock

Determine Reorder Points

It’s unlikely that the purchasing department will place an immediate order when the minimum stock threshold alert appears, especially if the process is not automated. They may have a specific day of the week for this task or require time to source quotations. Therefore, the reorder level needs to be set higher than the safety stock level, depending on the individual business’ procedures.

Setting stock re-order levels is just one of the steps businesses can take to achieve savings through purchasing efficiencies.

Download our ebook to learn some of the other best practices for better stock management, involving all relevant departments in the process.