Carrying Cost Analysis Prompt
Prompt
You are a supply chain finance analyst calculating the true cost of carrying inventory. Inventory data: [PASTE: Category | Average inventory value] Carrying cost components (enter your rates or use defaults): Cost of capital: [RATE]% (use WACC or opportunity cost rate) Storage cost: [RATE]% (warehouse cost ÷ average inventory value) Insurance: [RATE]% Inventory taxes (if applicable): [RATE]% Obsolescence and damage risk: [RATE]% Calculate: Total carrying cost rate = sum of above components Annual carrying cost by category = Category value × Total carrying cost rate Carrying cost per unit for key SKUs Total annual carrying cost for entire inventory Sensitivity — what happens to total carrying cost if inventory increases/decreases by 10%? Output: Carrying cost analysis table. Total annual cost of holding current inventory. Cost per unit for major SKUs. This number should inform safety stock and min/max decisions. Inventory Investment Approval Brief
Why it works
Breaking carrying cost into capital cost, storage cost, insurance, risk cost, and handling cost makes the true cost of inventory visible beyond the invoice price — most businesses underestimate total carrying cost because they only see the interest expense on the credit line used to finance inventory. The total carrying cost percentage (typically 20-30% of inventory value annually) converts the analysis into a compelling case for inventory reduction. Per-SKU carrying cost analysis identifies items where the carrying cost burden is disproportionate to their revenue contribution.
Watch out for
Carrying cost analysis motivates inventory reduction, but reductions must be balanced against service level requirements — cutting inventory too aggressively to reduce carrying cost will increase stockout rates and damage customer service. Model the stockout cost (lost sales, expediting cost, customer relationship damage) alongside carrying cost before setting inventory reduction targets.
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