Reducing holding quantities in inventory is often seen as requiring a corresponding increase with inventory risk. This might be the risk of extended downtime in manufacturing or the risk of lost sales in wholesale/retail.
However, this is not true.
For this to be true you must believe that the existing holdings are as lean as they can be in the current economic dynamic. While it is possible that this is true, experience shows that this is unlikely.
Consider some of the issues that might result in a need to change inventory holdings:
- The initial holding parameters will have been set without any history of usage and therefore might not have been correct. (They were after all a guess!)
- Suppliers might have implemented supply chain initiatives. In the past 10 years or so supply chain improvement has been a focus of most distribution activity so the initial assumptions might now be outdated.
- You might have experienced continuous improvement in your own systems (at least we hope so!)
- There may be new opportunities for consignment stock. Changing market dynamics may have created opportunities not previously available.
These are just some of the issues. In each of these examples, the actual inventory risk will have reduced significantly compared to the initial assumptions.
If the tolerance for risk has not changed, then reviewing these issues will not increase your risk
Addressing these issues requires a fresh consideration of the dynamics of supply and demand but do not necessarily require an increase in risk.
These myths are explained in the ebook 5 Myths of Inventory Reduction – available as part of the Practitioner Playbook.
Posted by: Phillip Slater