Inventory Carrying Costs: The Hidden Price of Too Much Safety Stock

Safety stock feels like insurance. After years of COVID fallout, tariff swings and shipping lanes opening and closing, many manufacturers have been rebuilding their inventory buffers. That protection isn’t free. Inventory carrying costs can run 20 to 30% of the value of the inventory itself, which means the cushion you built to protect production may be quietly draining your cash.

During a recent Moore on Manufacturing episode, Mike Sibley of James Moore sat down with host Faith to talk about whether just-in-time inventory still works. The discussion highlighted the importance of sizing inventory to real supplier risk, not to the latest headline.

Safety Stock Makes Sense, Up to a Point

Mike isn’t arguing against safety stock. In his view, “having some safety stock is prudent.” The problem is treating every part and every supplier the same way.

He also points out something that gets lost in the just-in-time debate. Plenty of smaller manufacturers never ran a true just-in-time system in the first place. When his team comes in, the more common issue is the opposite one: too much inventory, sometimes months more than the business actually needs.

What Excess Inventory Costs

This is where the numbers get uncomfortable. Mike puts it plainly: “If you’re a million dollars too much, now you got all these carrying costs. You got people moving this inventory around. You got extra warehouse space.”

Mike estimates carrying costs on inventory can be 20 to 30% of the inventory’s value, on top of the extra labor and warehouse space. As he puts it, “It can really create working capital challenges.

Overstock also tends to age badly. Parts go obsolete, reserves grow and product gets thrown out. His take is direct: “If you got a lot of obsolete inventory or you’re constantly throwing things out, there’s something wrong with your inventory strategy.”

Let Supplier Risk Decide How Much You Hold

The right amount of safety stock depends on where your materials come from and how much can go wrong along the way. Mike’s starting point is understanding your key suppliers well, because “your risks translate to my risks.”

Close, Reliable Suppliers Need Less Buffer

If a key supplier is nearby and dependable, you don’t need to stockpile what they make. “If their lead time is a few days and I can get that really easily and their downstream supply chain works really well, I can take that into consideration in terms of what my safety stock needs to be.”

Imported or Single-Source Items Need More

Imports are a different story. Mike notes that “importing even with tariffs may be cheaper than going domestic,” which is why many manufacturers still do it. But that savings comes with logistics risk and longer lead times. Some companies keep a domestic supplier on hand as a backup, just in case. Those higher-risk items are where safety stock earns its keep.

Plan From a Baseline, Not the Headlines

Part of what drives overstocking is reacting to every news cycle. Mike points to proposed 50% tariffs on goods from Canada that were announced and then called off, and to Middle East shipping straits that closed one week and reopened the next. “You’re just on a roller coaster on some of these things,” he says.

His answer is to set a baseline, assign a risk level to each supplier and inventory category and build coverage around that, “so that way I don’t have to be reactive to every single thing that happens out there.”

That plan has to include the financial side. Mike frames it as two questions every manufacturer should answer before adding stock: “What does that mean for my working capital? What does that mean for the carrying cost of this inventory?”

Hold the Right Inventory, Not the Most

The goal isn’t the leanest possible inventory or the biggest possible buffer. It’s carrying enough of the high-risk items to keep production moving while keeping the low-risk items lean enough that your cash isn’t stuck on a shelf.

If you’ve added safety stock in the last two years, do you know what it’s costing you to carry it?

Watch the full Moore on Manufacturing episode with Mike Sibley and Faith to hear more on supplier diversification, the financial metrics that show whether your inventory strategy is working and how to start planning for 2027. You can find it on the Moore on Manufacturing YouTube channel.

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