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Inventory questionhow do i reduce inventory carrying costs

How do I reduce inventory carrying costs?

You reduce inventory carrying costs by holding less excess stock, turning inventory faster, and preventing slow SKUs from accumulating. Since carrying cost typically equals 20–30% of unit cost per year, the biggest wins usually come from tighter reorder logic, cleaner SKU rationalization, and faster action on overstock.

20–30% of unit cost per yearStandard operations benchmark

Overview

Carrying cost is the quiet tax on every inventory decision. It compounds through storage, insurance, capital lockup, shrinkage, and obsolescence, especially when teams order too much or hold too many marginal products. The goal is not simply to cut stock everywhere, but to reduce the least productive inventory without increasing stockouts.

Quantify the cost before you optimize it

Start by multiplying average inventory value by the 20–30% annual carrying cost benchmark so you can see the true financial drag of slow stock. Without that number, it is hard to justify operational changes such as smaller POs, transfers, or markdowns.

Increase turnover on the right SKUs

Improving inventory turnover toward the common 6–8× annual benchmark is one of the fastest ways to reduce carrying cost. Use /calculators/inventory-turnover-calculator and Shopify Analytics → Reports → Inventory to identify which categories are holding too much stock for too little movement.

Tighten reorder and PO logic

Use /calculators/reorder-point-calculator and /calculators/eoq-calculator so you buy closer to actual demand instead of placing oversized POs. This becomes even more important before Stocky is discontinued on August 31, 2026, because Shopify is not replacing native PO automation or min/max logic.

Rationalize cash-draining SKUs

Use GMROI and inventory performance together when reviewing the tail of your catalog; any SKU below a 1.0 GMROI threshold deserves scrutiny because it is not generating enough gross margin to justify its inventory investment. Pair this with /questions/what-is-dead-stock to decide whether to markdown, bundle, or discontinue.

Formula

Annual carrying cost

Annual carrying cost = Average inventory value * Carrying cost rate

  • Average inventory value — Average inventory value: Average cost value of inventory held during the period
  • Carrying cost rate — Carrying cost rate: Annual percentage cost of holding that inventory

Worked examples

DTC supplements brand reducing carrying cost from excess inventory

  • Average inventory value: 80,000
  • Carrying cost rate: 24%
  • Target inventory reduction: 15,000
  1. 1. Multiply 80,000 by 24% to get annual carrying cost of 19,200.
  2. 2. Reduce average inventory value by 15,000 through tighter reordering and SKU cleanup.
  3. 3. Multiply 15,000 by 24% to estimate annual carrying cost savings of 3,600.

Result: Cutting average inventory by 15,000 reduces annual carrying cost by about 3,600 before any margin gains from cleaner assortment decisions.

Even moderate reductions in average inventory can create meaningful annual savings and free cash for growth.

How to apply this in Shopify

  • Use Shopify Analytics → Reports → Inventory to find slow-moving SKUs that create disproportionate carrying cost.

  • Pull velocity from Shopify Analytics → Sales by product before changing reorder points or order quantities.

  • Review Admin → Purchase orders to cancel, delay, or resize inbound stock that will worsen excess inventory.

  • Use Admin → Transfers to move idle stock to a faster-selling location before writing it down.

  • Apply Inventory adjustments after counts so carrying cost calculations use accurate inventory values, not inflated stock records.

Common mistakes

Treating carrying cost as just warehouse rent

The real carrying cost includes capital, storage, service, and risk, and usually totals 20–30% of unit cost per year.

Fix: Use the full carrying cost benchmark in planning reviews so excess inventory is measured honestly.

Cutting stock blindly

Reducing inventory across every SKU without regard to velocity or service level can lower carrying cost but raise stockouts.

Fix: Protect high-value A items first and reduce stock mainly on slow, low-GMROI, or overstocked products.

Keeping bad SKUs because they once sold well

Legacy products can consume working capital for months even after demand has structurally weakened.

Fix: Use turnover, sell-through, and GMROI reviews every month to remove emotion from discontinuation decisions.

Relying on Stocky until the sunset date

If Stocky currently drives your reorder logic, waiting until August 31, 2026 risks a messy transition and more excess inventory.

Fix: Migrate reorder and PO workflows into Synplex early so carrying-cost reduction efforts continue without interruption.

Frequently asked questions

Related resources

Related questions

Related guides

  • Purchase Order Process Guide for Shopify Merchants

    A step-by-step guide to designing a scalable purchase order process on Shopify - from low-stock signals to demand-driven PO creation, supplier communication, and receipt reconciliation. Includes SOP template and where native Shopify hits its limits.

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