Inventory is a buffer against uncertainty. A common image that I first came across when studying Goldratt’s Theory of constraints (which I highly recommend by the way), is that of a ship sailing on a lake. The ship represents the company and the water inventory. Below the water are rocks representing problems in the company. In order for the ship to safely pass over the rocks it must have enough water.
The rocks could be any number of problems and inefficiencies in the company. Poor forecasts, Problems with the supplier, Quality, Leadtime etc.
In order to get past these problems the company holds enough inventory to overcome them.
If they don’t hold enough inventory then the ship will hit the rocks. But inventory is expensive. You incur all the costs of purchasing and storing it. It is a sunk cost that you can’t recover because if you do then you risk hitting the rocks. This is why inventory is often a major focus point for investors because high inventory means their money is tied up and it also hides inefficiencies in the company.
Of course in the case of inventory there isn’t just one type of water. Every finished good and every component part of those finished goods will need some degree of inventory. These are commonly referred to as Stock keeping Units or SKUs. If a company has hundreds of SKUs it is like a ship moving at the same time on hundreds of oceans. There is probably some deep philosophical or quantum science example I could give here but I’m not clever enough to do so. Perhaps you can think of one and send it on to me.
The real solution is to ideally eliminate, or most likely reduce, the problems so you don’t need as much water to get over the rocks.
If you want help identifying and eliminating problems in your processes so you can in turn reduce inventory please contact us.