Ask an owner what their inventory costs and they will quote the purchase price. That number is already spent. The question that moves the P&L is what the inventory costs to keep, per dollar, per year, and for most operators the honest answer lands between 18 and 25 cents.
Nobody sees that number because no invoice arrives for it. It leaks out through four separate doors.
The four components
Capital, 8 to 10 points. Every dollar sitting on a shelf is a dollar borrowed at today's rates or a dollar not paying down the line. This is the piece that repriced hardest when rates moved, and most inventory policies were written when money was free.
Storage and handling, 4 to 6 points. The warehouse space, the racking, the forklifts, the people who count it, move it, and insure the building around it. Feels fixed until you need a bigger building.
Shrink and obsolescence, 3 to 6 points. Damage, spoilage, the engineering change that strands a component, the SKU that quietly stopped selling. This component is not evenly spread; it concentrates almost entirely in the slow-moving tail.
Insurance and taxes, 1 to 2 points. Small, real, and proportional to whatever you hold.
Run the number on your own book. A distributor holding $6M of inventory at 20% carrying cost is spending $1.2M a year to own it, and that line appears nowhere on the management reports.
The tail is where the money hides
Sort your SKUs by months of supply and the same shape appears that shows up in customer books and route networks. A working core turns 6 to 12 times a year and earns its keep. Then comes the tail: the safety stock nobody re-sized after demand fell, the "strategic" buy from three years ago, the dead SKUs kept because writing them down feels like admitting a mistake.
A $2M slow-moving tail at 20% carrying cost burns $400K a year while it waits to be dealt with. Keeping it is not neutral. It is a purchase you re-make every year without a purchase order.
The move on dead stock is almost always the same: liquidate, convert to cash, take the write-down once. Forty cents on the dollar today beats book-value pride plus $400K a year of carrying cost. The cash funds the working core, or comes off the line.
The discipline that keeps it fixed
Months of supply by SKU, reviewed quarterly, with reorder points re-sized to current demand instead of the demand from two years ago. An aging report for inventory, exactly like the one you run for receivables. And one owner for the number, because inventory that belongs to everyone belongs to no one.
We released $2.74M of cash from one distributor's working capital in under a year; the inventory tail was a third of it. The full teardown is in the Bluffline case study, and the weekly cash discipline that catches the drift early is the 13-week forecast.
If your inventory has not been sized against its real carrying cost since rates moved, start a conversation. The analysis takes days, and it usually finds six figures.