Inventory management touches nearly every function of the business, nearly every business process and employee make decision that ultimately affect inventory. I like to say that inventory is the sum of all planning decisions. But inventory also mean different things depending on who you ask. For sales people who are under intense stress to reach budgets product availability is key. I have yet to meet a sales person who thinks low inventory levels is a good thing. Yet it is vital for companies to stock out, very few companies can afford inventory levels that satisfy all demand round the clock.
High inventory ties up capital that can be used for growth opportunities or reduce debt. Oversimplified cfo’s are measured on their ability to keep costs to a minimum, not so much on keeping inventories to secure high product availability. The inevitable write offs that comes with keeping high inventory that turn into obsolete stock is one more stress driver and reason that CFO’s engage in the battle against high inventories.
In production the key is to utilize capacity effectively which rhymes with long production runs that minimize unit costs. This rarely goes hand in hand with low inventory levels. Producing more than needed in short term to keep unit costs low inevitable leads to stock levels that exceed forecast in the short.
Failing to control the psychological aspects of planning is a root cause to why companies rarely reach desired inventory levels.
Let’s start with fear. In terms of inventory few company can afford to meet customers’ orders all the time. To reduce inventory cost a certain level of stock out is accepted. Perhaps not like taking a punch from Tyson but going stock-out is not pleasant if you work in operations. stock out is often perceived as planning failure and from my experience the common reaction is to avoid it.
Having too much inventory is less nerve-wracking. The CFO might raise eyebrows but nothing like the men in black showing up in the corner office in stock out situations. In addition, high inventory can be justified with build up for seasonality or increased uncertainty in the market.
Stock-out don’t offer same escape ways, it’s real. In my experience the emotional imbalance between over- and understocking lead to high inventory 9 out of 10 times despite gazillions spend on IT and processes to right-size inventory.
Obvious as it may seem conflicting organizational agendas and fear of stocking out flourish in most companies and put an iron lid on potentials. Unlocking potentials takes a new view of what really drives inventory levels and accepting that behavior despite the best of intentions must be controlled continuously.