Inventory is Evil – Except When It Isn’t.
Inventory is evil. That’s the mantra of lean six sigma practitioners. The professional association for supply chain management, APICS, espoused this back in the 1980’s. And none other than Tim Cook of Apple agrees. I was first exposed to this sentiment early in my career by an experienced General Manager. It seems that everyone agrees that inventory is evil because:
- It ties up cash which might be better used in marketing efforts or product enhancements to drive more sales.
- It is often used as a crutch for inefficient sales, order management and production processes with uncompetitive cycle times and poor responsiveness.
- In its worst form, it ages with poor turnover, reduction to market write-downs and ultimately obsolescence.
- New product inventory may be subject to design deficiencies which can lead to component scrap or finished goods rework to make the product fit for purpose.
Are there any circumstances under which holding inventory is acceptable? When it isn’t evil? Apart from the obvious case of retail sales stock, holding inventory may be acceptable for small and mid-sized business if:
- Inventory holdings meet competitive benchmarks for turnover (days) and are biased away from finished goods to pre-process. Proper analysis of raw material safety stock holdings can support maximum production uptime, mix flexibility and competitive product lead times. Thorough ABC inventory analysis should also drive Just-In-Time (JIT) delivery for your most expensive components and larger Kanban re-order points for your penny stock items.
- Strategic finished goods holding are needed to support key customers, particularly for specialized products with strong sales but high short term demand variability. Often customers are willing to guarantee consumption of dedicated strategic stock or vendor managed inventory (VMI) in exchange for the responsiveness advantage provided by the stock.
- Marketing initiatives may need to be supported with inventory on hand. If you are launching a new product or trying to boost sales with a promotional campaign, the worst thing to do is to create strong customer interest only to then make them wait for product availability. Market seed stock (and production readiness) can eliminate this problem.
Inventory can be evil – a drag on your business. But it can also be an asset (literally and figuratively!). The objective is to strategically minimize your inventory while maintaining the right overall operations responsiveness and flexibility in support of your customers.