Reason to Hold Inventory – reason | customer expectation | inventory
Reason To Hold Inventory
Keeping an extra supply of inventory is a good thing. Wait a minute, aren’t we working hard to reduce our inventory? Yes, but there are valid reasons to carry additional inventory. Here are four good reasons to hold inventory. First and foremost, you might carry extra inventory to ensure you meet customer expectations. A safety stock of finished goods, for example, can make sure you fill your best customers’ orders even when demand suddenly increases.
Additional spare parts can help you meet emergency service needs. Scheduling extra call center employees during peak hours can provide excellent customer service after the sale. A second valid reason for holding inventory is to avoid disrupting operations in your company. A smooth flow of materials ensures equipment is running efficiently to meet production schedules.
Holding additional materials and products also helps to prevent rush orders, both within the factory and from warehouses. Third, you need safety stock. I already mentioned why you would hold a stock of finished goods, but you also can use a safety stock of materials and supplies to hedge against an industry shortage or price increases. And the fourth reason to hold additional inventory is to take advantage of quantity discounts offered by your suppliers. Often, the discounted price can offset the cost of holding the extra inventory or more. Good purchasing agents will constantly do this financial calculation. But for each of these valid situations, there are also four bad reasons for holding inventory.
In each case, the additional inventory is covering up a problem. Your job is to address the problems directly and to fix them. One bad reason for holding extra inventory is to compensate for poor supplier performance. Perhaps you rely on a single supplier with an unreliable delivery record. Rather than keeping more inventory on hand, the purchasing department should be working to improve the supplier’s performance. Or they should be looking for additional suppliers or maybe doing both.
A second issue is inefficient company processes. High levels of rework, scrap, or customer returns are often compensated for with higher inventory levels. And this is not limited to the factory. Poor processes and mistakes made in warehouses, distribution centers, and office centers are often covered up by higher inventory levels. Third is inaccurate forecasting. Forecasts are estimates, so they are always wrong. But poor forecasting of customer demand can lead to excessively high inventories. Work closely with the customer to get better feel for future demand and how you can mend it.
The last bad reason to hold inventory is when you are compensating for long supply and distribution channels. When your suppliers and your customers are located far from you, it takes longer to fill your customer’s order, planning is more difficult, risk is greater, and processes are more complex.
All this causes more inventory to be in the system. Global networks must be constantly evaluated for the impact on company inventory levels. For example, using local suppliers and putting factories closer to the final customer can shorten these channels and reduce inventory levels. In summary, it’s OK to hold extra inventory if you are doing it for the right reasons. But even inventory held for the right reason must be managed at the lowest level possible. No matter what your job is in your company, you probably have access to several processes that impact inventory.
No matter what your job is in your company, you probably have access to several processes that impact inventory. Take a look at one of them. Are you holding extra inventory for the wrong reason? If so, don’t cover up the problem. Fix it.