What is a storage interest rate?
The storage interest rate is a storage ratio. It represents the capital tied up in the average stock in relation to the possible interest income at standard capital market conditions. It answers the question of how high the capital costs are for the capital tied up in stock. In other words: How high are the current costs of readiness to deliver? Viewed the other way round, the ratio provides information on how much money could have been earned with the capital tied up in the stock if the stock did not exist.
The following formula is used to calculate the inventory interest rate:
(interest rate × average storage period) / 360
For example, if the storage period of an item is 60 days and the standard market interest rate is 2.5% per year, the result is
(2,5 × 60) / 360 = 0,42 %.
In order to keep the storage interest rate as low as possible, stock levels must be optimised - ideally, they should be just large enough to ensure delivery readiness at all times.
Measures to reduce the storage interest rate:
- Sell off items that are not in demand via special promotions
- Define or optimise minimum stock levels, reorder levels and maximum stock levels
- Optimise ordering behaviour
- Introduce a warehouse management system to permanently monitor and minimise interest on stock
