For years, corporate procurement teams operated on a simple assumption: inventory is cheap to hold, so the optimal strategy is to buy in bulk, secure volume discounts and keep production lines running. That assumption has unravelled. Since central banks began raising interest rates in 2022, the cost of carrying inventory has risen sharply. Combined with higher warehousing rents, labour costs and insurance premiums, the total cost of holding stock has become a material drag on working capital. This article examines what changed, why it matters for procurement strategy, who is affected and what may happen next.
What Changed: The Mechanics of the Squeeze
The working capital squeeze has three interconnected drivers. First, interest rates. The Bank of England base rate rose from 0.1% in December 2021 to 5.25% in August 2023, where it remained through early 2025. The European Central Bank and US Federal Reserve followed similar paths. For a company carrying £100 million in inventory, each percentage point increase in interest rates adds roughly £1 million in annual financing costs if the inventory is debt-funded. Second, warehousing costs. Industrial property rents in the UK rose by approximately 25% between 2021 and 2024, according to data from real estate advisory firms. Labour costs for warehouse workers have also increased, driven by minimum wage rises and competition for staff. Third, insurance and shrinkage costs have risen as inventory values have increased and supply chain disruptions have made theft and damage more frequent. The combined effect is that the annual carrying cost of inventory, which many finance teams historically estimated at 20-25% of inventory value, has moved closer to 30-35% for some sectors.
Why It Matters: The Strategic Trade-Off
Procurement teams now face a sharper trade-off between supply security and capital efficiency. The just-in-time (JIT) model, which minimises inventory and relies on frequent, reliable deliveries, became dominant in the 1990s and 2000s. It worked well when capital was cheap and supply chains were predictable. The post-pandemic period exposed JIT's fragility: shortages of semiconductors, shipping container bottlenecks and raw material disruptions forced companies to hold more safety stock. That shift, often called just-in-case (JIC), increased inventory levels across many industries. But the cost of holding that extra stock has now risen significantly. Companies that increased inventory buffers to protect against disruption are now paying a higher price for that insurance. The strategic question is whether the cost of holding extra inventory exceeds the cost of potential stockouts. For many firms, the answer is becoming less clear.
Who Is Affected: Sector-Level Exposure
The squeeze is most acute in sectors with high inventory-to-revenue ratios and long cash conversion cycles. Retailers, particularly those in fashion and consumer electronics, face high carrying costs on seasonal stock that may become obsolete. Automotive manufacturers, which hold significant raw materials and work-in-progress inventory, are exposed to both interest rate risk and warehousing costs. Industrial distributors, who typically carry thousands of SKUs across multiple warehouses, face a direct hit to working capital. Smaller firms are disproportionately affected because they have less access to cheap debt and fewer options for inventory financing. Larger firms with strong credit ratings can still access working capital facilities, but at higher rates. Private equity-backed portfolio companies, which often carry higher leverage, are particularly sensitive to inventory carrying costs because they have less financial headroom.
Commercial Impact: Procurement Strategy Shifts
Procurement teams are responding in several ways. First, many are re-evaluating safety stock levels using more sophisticated demand-sensing tools. Instead of setting blanket inventory targets, they are using machine learning models to forecast demand at a granular level and adjust stock levels dynamically. Second, supplier financing programmes are expanding. Rather than holding inventory themselves, some companies are negotiating longer payment terms with suppliers while offering suppliers access to early payment platforms. This shifts the carrying cost burden to the supplier but requires careful relationship management. Third, some firms are moving to consignment inventory models, where the supplier retains ownership of the stock until it is used. This reduces the buyer's balance sheet exposure but typically requires a premium payment to the supplier. Fourth, procurement teams are consolidating suppliers to reduce the number of SKUs and simplify inventory management. Fifth, there is growing interest in nearshoring and regional sourcing to reduce lead times, which allows lower safety stock levels. Each of these strategies has trade-offs. Supplier financing can strain supplier relationships. Consignment inventory can increase per-unit costs. Nearshoring may reduce inventory but increase labour costs.
Risks and Unknowns
The outlook is uncertain in several respects. If interest rates fall in 2025 or 2026, the carrying cost pressure will ease, but it is unclear how quickly central banks will cut rates or how low they will go. Warehousing costs may continue to rise if industrial property supply remains constrained. Labour costs are likely to keep increasing, particularly in markets with tight employment. There is also a risk that companies cut inventory too aggressively in response to cost pressure, leaving them exposed to supply disruptions. Geopolitical risks, including trade tariffs and shipping route disruptions, could force companies to hold more inventory again, reversing the current trend. The optimal inventory level is not a fixed number; it depends on interest rates, supply chain reliability and demand volatility, all of which are uncertain.
FY Outlook
Over the next 12 to 18 months, we expect procurement teams to continue shifting towards more capital-efficient inventory models, but not a wholesale return to JIT. The most likely outcome is a hybrid approach: lower safety stock for predictable, low-margin items and higher buffers for critical, high-volatility components. Technology investment in demand forecasting and inventory optimisation software will accelerate. Supplier financing programmes will become more common, particularly in sectors with long cash conversion cycles. Companies that can accurately model the trade-off between carrying costs and stockout costs will have a competitive advantage. Those that cannot may find themselves either overstocked and capital-constrained or understocked and unable to fulfil orders. The working capital squeeze is not a temporary phenomenon; it is a structural shift that will reshape procurement strategy for the foreseeable future.
Conclusion
Rising inventory carrying costs, driven by higher interest rates, warehousing costs and labour expenses, are compressing working capital and forcing procurement teams to rethink long-held assumptions. The trade-off between supply security and capital efficiency has become more acute. Companies that respond with data-driven inventory optimisation, supplier financing and strategic sourcing will be better positioned. Those that rely on outdated models or cut inventory without understanding the risks may face disruption. The working capital squeeze is a market reality that demands a disciplined, analytical response.
