The Hidden Costs of Spare Parts Inventory: A Guide to Reducing Carrying Expenses

It’s a common misconception that once a spare part is purchased and stored, it no longer costs anything to keep it there. In reality, holding spare parts imposes significant ongoing expenses.

Most companies are not self‑insured. Insurance premiums typically exceed 5% of the total inventory value, and even with low current interest rates, borrowing capital to finance inventory usually incurs an additional 5% or more. Every dollar tied up in inventory represents a dollar that could be invested elsewhere.

In many states, inventory tax is applied to the total value of all stocked items, not just those that are used daily. Simply owning the parts triggers a tax liability.

When you add wages, facility costs, utilities, and administrative overhead, the annual carrying cost can reach 20% or more of the inventory value. This is a recurring expense, not a one‑time cost.

For example, purchasing a $5,000 motor to keep on hand may cost an additional $1,000 each year in carrying charges.

These costs can double quickly. If the motor isn’t part of a preventive maintenance program, it may perform poorly or have a shortened lifespan once it’s finally used.

Turning inventory over regularly reduces carrying costs. Keeping items idle under the “just in case” mindset is expensive because idle stock still incurs storage, handling, and opportunity costs.

Obsolete or unusable parts are even more costly. They consume valuable time and space for counting, moving, cleaning, and other non‑value‑added activities.

Each handling event incurs a cost, and without regular inventory reviews, obsolete items and excess stock continue to inflate carrying expenses.

During inventory reviews, remove parts that are damaged, corroded, cannibalized, or broken, and order replacements as needed.

A well‑managed storeroom delivers the right part, in the right condition, at the right time and cost to support equipment reliability and production uptime. Building supplier partnerships and focusing on truly critical spare parts can significantly reduce inventory investment and carrying costs.

Eliminating obsolete inventory and trimming stock levels beyond the maximum thresholds immediately lowers carrying cost exposure. While some costs are harder to quantify, the overall concept is clear: carrying spare parts is not free.

This article appeared in the April edition of RxToday. For additional information, visit the Life Cycle Engineering Web site at www.LCE.com.