Holding stock is expensive and estimates on the annual cost of holding stock vary from 25% to 75% of the stock value. These costs are made up of four broad cost areas: the capital cost of the money tied up in stock; the costs of servicing that stock, such as insurance and materials handling; the warehouse and storage costs; and the cost of damage, losses and shrinkage. The capital cost of the stock includes the opportunity cost of what that money could have done if it wasn’t sitting on a pallet, and may be estimated at about 10% per annum. Taxes and insurance will contribute a further 5%, warehousing and materials handling will contribute a further 10%, stock control systems and administration 5% and loss, obsolescence and theft will add a further 2.5%. This broad generalisation suggests that up to a third of the annual cost of stock is spent on maintaining it. See also Muda and Stock Control.

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