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What are warehousing costs and why do businesses "burn money" in inventory without realizing it?

Dang Thi Ngoc Nhan

What are warehousing costs?

Many businesses are only just beginning to ask the question. What are warehousing costs? When profits decline, cash flow becomes strained, or year-end financial reviews are approaching, inventory has ballooned, costs have been incurred, and the situation is virtually irreversible in the short term.

The issue isn't whether the business has a warehouse or not, but rather... Where are inventory costs hidden within the financial system?Who is actually responsible for this expenditure, and why is it rarely accurately measured in terms of cash flow and profit?

Let's explore what warehousing costs are, why businesses are "burning money" in inventory without realizing it, and how CFOs can control these costs before they silently erode profits and cash flow.

Index

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I. What are warehousing costs?

Storage costs To be The total cost incurred to keep goods in the warehouse from the time they are received until they are shipped out., including not only warehousing costs, but also cost of capital, operating costs, and risk costs of inventory.

In other words, every day the goods in the warehouse are being spending money, even though the accountant did not see any new expense entries recorded.

How does warehousing cost differ from "warehousing costs" and "inventory costs"?

This is a point where many businesses get it wrong:

How do warehousing costs affect profit and cash flow?

A warehouse is not just an operational problem, but a real challenge. a purely financial problem.

II. What does warehousing cost include?

To control and optimize the efficiency and cost of warehousing. It shouldn't be viewed as a single expense.which needs to be Break it down into 4 core cost groups.This breakdown helps businesses clearly identify: Are you spending money because of capital, space, operations, or risks? – and from there choose the right leverage to handle it.

1) Capital costs tied up in inventory

This is The largest but most "invisible" cost group. in warehousing costs, because it It does not appear directly on the invoice or monthly expense report..

The cost of tied-up capital includes:

Commonly overlooked points:
Many businesses only see warehousing costs, but Never convert inventory to cost of capital on a daily basis.This causes inventory to balloon without anyone feeling the immediate "pain."

2) Storage space cost

This is the cost group. most visiblebut often not allocated according to actual usage levels..

Warehouse space costs include:

Commonly overlooked points:
Many businesses:

3) Inventory service cost

This is the cost group. daily operation, which usually increases gradually with size, but It is rarely monitored by clear KPIs..

Include:

Commonly overlooked points:
Typical inventory service costs:

4) Inventory risk cost

This is the cost group. It only comes to light when actual damage has occurred., and often causes significant shocks to profits.

Inventory risk costs include:

Commonly overlooked points:
Deadstock is not just "unsold goods," but rather:

Below is Part III is fully implemented in blog format., focusing on Calculation method – interpretation – use in management decision-making, consistent with the intent of the CFO and operations.

What are storage costs?

III. How are warehousing costs calculated?

Know What are warehousing costs? That's not enough. The more important issue is: How to calculate and use this in business decision-making?, and not just for "reference purposes".

In fact, There is no single way to calculate it. For all purposes. Businesses should use it. at least 2 of the 3 methods below To cross-check and avoid situations where the data looks good on paper but is inaccurate in practice.

Method 1: Calculate the inventory value using the % method (Carrying cost %)

This is how it's calculated. most popular, often used by CFOs for:

Recipe:

Carrying cost (%) = (Total annual inventory cost / Average annual inventory value) × 100

In there:

The correct understanding:

Carrying cost % answers the question:

"If a business keeps 1 unit of inventory in stock for a year, how much is it spending?"

For example:

When should you use this method?

Limit:

Method 2: Calculate by storage unit (pallet, m², m³, bin)

This method shifts warehousing costs from abstract financial figures luxurious specific operating unitThis is very useful in warehouse management and warehouse lease negotiations.

Some common calculation methods:

The correct understanding:

This calculation helps answer:

"How much is each warehouse position costing per day/month?"

For example:

When should you use this method?

Limit:

Method 3: Calculated based on SKU and "stock availability days" (Cost per SKU-day)

This is how it's calculated. strongest for portfolio decisionHowever, few businesses apply it correctly.

Recipe:

SKU storage cost = (Carrying cost % / 365) × SKU value × Number of days in storage

The correct understanding:

This method answers a very "valuable" question:

"Which SKUs are incurring negative profit simply because they've been sitting in inventory for too long?"

For example:

→ The storage cost for this SKU is approximately 32.9 million VND.
→ If the gross profit margin is only 30 million → Selling this SKU is a loss., even though the selling price remained unchanged.

When should you use this method?

Outstanding strengths:

IV. What factors cause warehousing costs to skyrocket?

In fact, Storage costs rarely increase due to a single cause.It usually spikes when Inventory turnover has slowed down., while Inventory data (inflow, outflow, and stock) no longer accurately reflects actual operations..

The danger is: most of the reasons for increased warehousing costs are related to these factors. not in storage, which is located Purchasing decisions, financing, and data management..

Inventory costs increase when inventory turnover slows, but nobody seems to notice.

A decrease in inventory turnover is the first sign, but it is often overlooked because:

When goods are held up longer than expected:

This is why many businesses only discover that warehousing costs are "profit-making" expenses. after the quarterly or annual report has been finalized..

Common operational causes

These causes stem from Purchase decision – forecast – warehouse layout, not from the warehouse itself.

1. Incorrect forecasts and ordering based on emotion.

This is the most common cause.

Consequences:

2. There are no clear reorder points or safety stock levels.

Many businesses:

The result is:

3. Large MOQ, long lead time, bulk orders based on deals.

A very common mistake:

But again The benefits of the purchase price cannot be converted into storage costs..

For example:

This is why CFOs often say:

"A good deal when buying can be a terrible deal when it comes to inventory."

4. Poor warehouse layout, inefficient storage space.

The increase in warehousing costs is not only due to... many items, but also because Poor warehouse management.

Common errors:

Consequences:

Financial causes are often overlooked.

This is the most dangerous group of causes because Not included in the inventory report., which is located within financial expense and process reports.

1. Electricity and warehouse maintenance costs are not budgeted separately for each warehouse.

Many businesses:

Consequences:

Costs continue to rise steadily, but no early warning.

2. Warehouse rental costs increased but were not allocated per storage unit.

A common financial mistake:

Then:

3. Discrepancies between Purchase Order (PO), Retail Price (GR), and Invoice lead to inflated inventory costs in the accounting records.

This is the reason least recognizedbut it has a direct impact on accounting inventory value.

Common scenarios:

Consequences:

V. Which KPIs should businesses measure to control inventory costs?

Many businesses share the same feeling: "The warehouse is expensive.".
But when asked specifically... Where did the expense come from, how much did it cost, and what decisions caused the expense?However, there is no clear answer.

The root cause lies in the fact that There is no sufficiently in-depth KPI system to break down warehousing costs.When not measured correctly, businesses often fall into two dangerous extremes:

A good set of KPIs isn't about "blaming the warehouse," but about helping the management team. Making decisions that balance cost, service, and cash flow..

Foundation KPIs: Must be included

These are the KPIs that help businesses gain clarity. inventory turnover and capital tie-up levelsThis forms the basis for all meaningful cost optimization in warehousing.

DOH – Days of Inventory on Hand

DOH stated that if they stopped importing goods at the present time, how many days' worth of inventory would remain in the warehouse?
The higher the DOH, the longer cash is "tied up" in inventory, leading to increased capital costs and inventory risk.

From a CFO's perspective, each additional day of DOH is not just another day of holding inventory, but... add capital costs, warehousing costs, and risk costs..

Inventory Turnover

Inventory turnover reflects the speed at which inventory is converted into revenue.
Low turnover often means excess inventory, slow-moving goods, and high storage costs.

It is important not to compare turnover between different industries, but rather to:

Fill rate and Stockout rate

Many businesses reduce warehousing costs by… cutting inventory, but fail to measure fill rate.
As a result, the warehouse was less cluttered, but orders were short, customers complained, and revenue dropped.

Fill rate and stockout rate help ensure optimal inventory management. We will not compromise on service quality and revenue..

Slow-moving and Deadstock based on inventory days thresholds.

Not all warehouses are "burning money" in the same way.
In reality, the majority of warehousing costs come from a small percentage of slow-moving SKUs.

Classifying inventory by the number of days it has been stored helps businesses:

Advanced KPI group: Few businesses measure these, but when they do, they provide very good control.

These are the KPIs that help businesses. Moving from inventory management to inventory cost management. – something that the CFO's perspective is particularly interested in.

Energy cost per unit of storage

This is especially important for cold storage and refrigerated warehouses. Instead of just looking at the total electricity cost, businesses should convert energy costs per cubic meter or per storage day.

This measurement method helps detect:

Shrinkage rate – Inventory loss rate

Losses result not only from theft, but also from damage, inventory discrepancies, and handling procedures.

Measure shrinkage as follows:

It helps businesses clearly identify where the problem lies. people, processes, or storage conditions.

Cost per pallet-position according to each zone

Not all warehouse space costs the same.
A pallet near the exit, on a high shelf, or in a cold storage area has a much higher "value" than one in a regular area.

Without measuring costs by location, businesses can easily:

Return processing costs are converted into inventory.

Returned goods not only incur processing costs, but also end up back in the warehouse, further increasing inventory days.
Failing to factor return costs into inventory costs leads businesses to underestimate the true impact of returned goods.

Why do many businesses have KPIs but still fail to control inventory costs?

The problem isn't a lack of data, but rather:

A KPI is only truly valuable when:

Controlling inventory costs doesn't start with cutting stock or reducing inventory, but starts with... Accurately measure KPIs.When businesses view inventory costs from a financial perspective, each inventory decision will no longer be based on intuition, but become a sound decision. money management decisions.

VI. Ways to Reduce Inventory Costs from an Operational Perspective

Essentially, all efforts to reduce warehousing costs revolve around two core levers:

Optimizing only one aspect will not yield sustainable results. A business might reduce inventory, but if the operating cost per pallet is too high, the overall cost will still be substantial. Conversely, if the warehouse operates cheaply but the goods sit idle for too long, the money will still be tied up.

Below are groups of operational solutions that have a direct and measurable impact.

1. Optimize warehouse space without opening new warehouses.

Many businesses are considering opening more warehouses as storage costs rise, while The problem lies in how the current space is being used..

Standardize slotting according to ABC/XYZ
Classifying SKUs by shipment frequency (ABC) and demand stability (XYZ) helps to:

Increase storage density instead of increasing area.
Many warehouses waste height:

Investing in high shelving and optimizing aisle space is often much cheaper than renting additional warehouse space, but it significantly reduces storage costs per pallet.

Fast-slow zone separation
When all SKUs are "on the same platform," the average processing cost will increase.
Clearly separating fast-turn zones from slow-turn zones helps to:

2. Increase inventory turnover without causing stock shortages.

Reducing inventory doesn't mean "cutting stock." Doing it the wrong way can lead to shortages, lost revenue, and operational disruption.

Establishing a safety stock is based on data, not on intuition.
Safety stock should be calculated based on:

Ordering safety stock based on "experience" often leads to inflated inventory levels with no one taking responsibility.

Finalize reorder points based on sales data.
The reorder point must reflect:

If the reorder point doesn't update according to the data, businesses will consistently import goods either too early or too late – both of which increase warehousing costs.

Proactively manage slow-moving inventory.
Slow-moving inventory doesn't disappear on its own. The longer it's stored, the higher the storage costs.
Common measures include:

3. Choose an inventory strategy that suits each product group.

There is no one-size-fits-all inventory strategy. Each product category requires a different approach.

VMI (Vendor Managed Inventory)
Suitable for stable raw materials, which helps to:

Consignment stock
Applicable to high-value, high-risk goods:

Cross-docking
With fast turnaround time:

Just-in-time
It is only effective when:

VII. Technologies that help reduce warehousing costs: WMS, ERP, and financial control layer.

A common mistake is setting expectations. a single system solves the entire warehousing cost problem..
In reality, each layer of technology addresses a different aspect.

WMS helps solve warehouse operations problems.

WMS focuses on "doing it right - doing it fast - doing it with few errors" in the warehouse:

Thanks to that:

However, WMS has no control over the money..

A layer of financial control helps prevent expenses from "going astray".

Storage costs don't just arise within the warehouse; they start from:

The financial control class helps to:

Why is it necessary to combine both?

Only when these three layers work together can a business:

Below is Part VIII is fully developed in a blog-style format.The diagram clearly outlines "What Bizzi does – what it doesn't do – where the real value lies," avoiding confusion between Bizzi and WMS or ERP systems.

VIII. How does Bizzi help businesses control and optimize warehousing costs?

First, one important point needs to be clarified: Bizzi is not a replacement for WMS. and it doesn't delve into the pure operation of the warehouse.
Bizzi's role lies in Financial control layer – documents – cash flow, where a lot of "fictitious" warehousing and inventory costs are created, which businesses often discover too late.

In other words, Bizzi is in control. the "firsts" This generates and inflates warehousing costs, rather than simply dealing with the consequences once the warehouse is full.

1. Bizzi IPA + 3-way matching: Blocks "fictitious" inventory right from the start.

One of the biggest reasons for the increase in warehousing costs is The inventory value recorded in the books is higher than the actual value.This usually stems from a discrepancy between:

Bizzi IPA uses AI + RPA to auto:

Thanks to that, Bizzi:

This is an important foundation for Storage costs accurately reflect reality., not inflated due to document errors.

2. Bizzi Expense: Transforming warehouses from "cost blind spots" into budget-driven units.

In many businesses, a warehouse is where:

Bizzi Expense helps Put budgetary discipline into warehouse operations. by:

When the warehouse has a budget and early warning systems, storage costs are controlled. proactiveInstead of passively processing the information.

3. Bizzi verifies suppliers: reduces the risk of expenses being disallowed during settlement.

Storage costs are not just an operational problem, but also a factor. tax problem.
A portion of warehousing costs may be disallowed if:

Bizzi supports:

As a result, businesses:

4. Bizzi ARM: Reducing capital costs to "maintain inventory"

Storage costs are not just about the warehouse itself, but also about... cash flow.
When cash is tied up in accounts receivable, businesses typically have to:

Bizzi ARM helps:

When DSO decreases:

5. Storing invoices for 10 years: a clean data foundation for long-term inventory cost analysis.

Storage costs cannot be optimized if data is fragmented, documents are lost, or storage methods are different each year.

Bizzi helps:

In shortBizzi doesn't "make warehouses run faster," but it helps businesses:

IX. Inventory Cost Breakdown Table – Self-Check in 30 Minutes

If you only have 30 minutes To review inventory costs before a reporting period or executive meeting, the table below helps you quickly identify them. Where are the expenses being "burned"?: capital, space, operations, or inventory risk.

Quick Self-Assessment Chart for CFOs & Heads of Supply Chains

Cost group Quick quiz questions Data to view Warning signal Priority action
Capital cost Inventory is increasing, but revenue isn't? Average inventory, WACC / interest expense DOH increases, rotation slows down. Handling slow-moving, deadstock
Warehouse space Are warehouse rental costs increasing monthly/quarterly? Lease contract, m² / m³ of usable space Cost per square meter is constantly increasing. Layout optimization, 3PL negotiations.
Warehouse operations Are electricity, supplies, and repair costs increasing unusually? Electricity bill, operating costs Exceeding warehouse budget Set budget and set alerts.
Inventory risk Do losses and damages increase by product group? Inventory and shrinkage record Deadstock price increase Clearance sale, adjustment of purchasing policy.

The most effective way to use this table

Frequently Asked Questions about Storage Costs

Are warehousing costs standardized according to the industry ("%")?

There is no standard ratio that applies to all businesses. However, many studies show that Carrying costs typically range from 15–30% of inventory value per year., and potentially higher for cold storage, FMCG, or high-value goods industries.

How does cold storage differ from regular storage in terms of storage costs?

The cold storage facility includes:

Should we reduce inventory first or optimize the layout first?

If Dose of oxygen is too high.Prioritize reducing inventory first.
If inventory is reasonable but high space and operating costsOptimize the layout and storage density.

When should you hire a 3PL instead of operating your own warehouse?

When:

Conclude

What are warehousing costs? This is not just a question of definition, but a financial management issue that directly impacts profitability, cash flow, and the long-term health of a business. In reality, most businesses don't "burn money" because warehouses are expensive, but because... They don't fully see the scattered costs of warehousing, which are spread across capital, space, operations, and inventory risk..

When warehousing costs are not properly measured, businesses often fall into three familiar traps: bloated inventory with no one taking responsibility, out-of-control warehouse operating costs without a clear budget, and capital tied up in inventory until cash flow becomes strained and needs to be addressed. At that point, optimization becomes merely a stopgap measure, rather than a proactive one.

From the CFO's perspective, effective inventory cost control doesn't begin with cutting inventory or reducing stock at all costs, but rather with... The right data, the right KPIs, and an early decision-making process.A well-managed business is one that knows which SKUs are "eating up" money, which costs are increasing unusually, and acts before those figures appear on the finalized financial statements.

In this context, technology does not replace warehouse operations, but plays a crucial role in them. Prevent discrepancies, control cash flow, and clean up inventory data on the books.When costs are budgeted, invoices are rigorously reconciled, and accounts payable are proactively managed, warehousing costs will accurately reflect reality – a prerequisite for sustainable optimization.

In short, businesses that control warehousing costs well do so not because they have cheaper warehouses, but because they Seeing the costs earlier than others and making decisions before it's too late..

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