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Is higher inventory a panacea for availability issues in Supply Chain?
There is a strong feeling in many Supply Chain teams that availability issues can be solved through higher inventory. However, they don’t use it just because of working capital restrictions. Is it true?
No, it’s not. If the supply chain is not capable of reading evolving demand trends, stockouts will persist despite higher inventory. If the backend operations are rigid, stockouts will continue. In fact, higher inventory often makes the backend operations even more inflexible. If the backend takes too long to respond to demand shifts, stockouts will persist. Higher inventory often increases the response time, making it even worse.
To top it up, we do have limitations of money and space, making high inventories more of a burden. If you believe higher inventories would solve the problems of stockouts, it’s time to challenge it.
Evidence is all around us to prove it. Do obese people, with a lot of accumulated fat, feel less hungry? If a distributor has very high inventory level, do we see lower stockouts?
In fact, higher levels of inventory correlate strongly with higher stockouts. What we need instead are leaner operations with demand sensing capability, which are flexible and responsive to demand shifts.