Inventory is our treasure

Inventory is waste: a statement I still hear far  too often. Even recently in a debate with supply chain professionals about the impact of e-commerce. Perfectly in line with the populist Lean view, but dangerous in the wrong hands. I can not say it often enough: inventory is not waste. Inventory is our treasure, provided that it is available in the right location and in the right amount.

Supply and demand have the unfortunate tendency to always be different, so companies have to balance them. In case they fail to do this sufficiently, they end up with residual products or lost sales. In order to balance demand and supply, there really are only two levers to play with: capacity and time. Capacity in this case means (temporary) overcapacity. Time means starting before an order has been received and/or taking more time than strictly necessary afterwards.

Time

The disadvantage of capacity is that it costs money. This is why everybody in most, in fact in all cases, diverts to time. Think about it: name one process in which everybody is always serviced in the shortest possible time. I do not know one and for a good reason; the ability to always and immediately handle any deviation between demand and supply is simply too expensive. So we ask our customers to be patient. In case our customer does not have this patience, we have to start before receiving the orders which, in all but a few cases, will result in inventories.

The conclusion must be that consciously or not, companies choose to use time and therefore inventory as a compromise for capacity. Thanks to this time, so  thanks to inventory, they are able to handle the variability in demand and supply and therefore earn money. Inventory is our treasure.

It is a pity though that companies make such poor use of the available time. Far too often, inventory is placed in the wrong location and in the wrong amount. Caused by the fact that companies do not manage their inventory well enough and fail to really understand its function and true value. To make matters worse, the requirement to keep inventory is generally bigger than necessary, because the root cause of this requirement – variability in demand and supply – to a large extent happens to be caused by themselves. Inventory is not waste, inventory is our treasure. We just need to make it shine.

Alex Tjalsma, partner/consultant Involvation