16 Reasons Why it is a Good Idea to Increase Inventory!

When I wrote the article 18 Targeted Inventory Reduction Strategies for Supply Chain Professionals, I got some criticism from some of my readers that I am misleading the supply chain community and there are equally valid and reasonable reasons where we should actually increase inventory! Fair point?

The benefits of inventory management is undisputed, and setting the right systems to counter several identified factors requires much more from professionals. Once your business understands the importance of inventory management, the full range of its benefit becomes apparent and appreciated.

Below I have shared 16 scenarios where it is beneficial to increase your inventory.

Before launching onto this, let's remind ourselves of what is Inventory Management?

Inventory Management and control implies "the controlling of business stock or controlling the movement of products and services following their demand."

In today's business world, Inventory Management and control is extremely helpful as they play vital roles in any business’s failure or success that has a competitive market. An adequate inventory or safety stock in place enhances business operations with the effective flow of goods and services to meet customer service. 

One word of caution before you read further: Inventory management generally carries a heavy burden, and that burden is the cost of carrying the inventory. You probably benefit by reading INVENTORY CARRYING COST – 9 PAINFUL CONTRIBUTORS YOU SHOULD TRACK.

In simple terms what do we mean by the cost of carrying the inventory? Someone has to pay for warehousing the inventory and pay interest on the money used to do both. Money tied up in paying for the above is money that cannot be used for other purposes. Who pays for all of this? It will be the company carrying the inventory, and that means the cost is ultimately passed on to the customer. Therefore, before you decide to increase inventory, make sure you consider all the factors in the inventory carrying cost.

So, When It is OK to Increase Inventory?

The flow usually entails buying a defined number of stocks, selling, or utilizing them until an acceptable number remaining is reached before ordering more, this is essentially a very simplistic core idea of Inventory Planning.

I believe there are several good reasons for increased inventory. Like any other supply chain decision, your decisions should align with the business plan. Starting from the point of the analysis, below are the top reasons to decide when it is OK to increase inventory.

1-    New Product Introduction

In most businesses, introducing new products necessitates that manufacturers not only carefully craft the initial launch stock plan for their distributors and/or retailers but also consider how the demand will be controlled, during the Sales and Operations Planning Cycle. 

The profile of Inventory Turns is mostly contingent upon the new product's success. However, one thing is clear, it is impossible to have a successful launch of a new product without having the right quantity of stock in place.

So, my humble suggestion to supply chain folks is to listen to your product managers and sales guys, have the right launch stock in place. If they don’t sell it, make them accountable!

2-    Product Phase-in and Product Phase-out (Product Transition)

Product Phase-in and Product-Phase-out could happen for multiple reasons, for example:

• It could be an old product is phasing out- due to new product phasing-in
• Source change- which forces the production of stock from an old supplier to continue and overlap while you are in the process of bringing a new supplier on board or vice versa
• When there is regulation change- which forces companies to produce stock for old regulation due to demand while building stock product which fits the new regulation criteria for future phase-in
• Manufacturing site move- which forces stock production to continue as a contingency in anticipation of manufacturing issues at the new site.

There are many more examples that depend on the business you are in, but you get the gist here.

3-    Known Supply Variability and Demand Variability

An increase in demand variability would mostly imply that you are to increase inventory in the future. Similarly, when there is high supplier lead time variability your first impulsive action is to increase inventory to avoid the ‘out-of-stock’ situation. This phenomenon of Demand and Supply lead time variation is built-in in most safety stock formula. So, it's okay to increase inventory whenever you're faced with demands variability and supply variations.

4-    Adjustment for any Market/Industry Seasonality.

One of the forecasted instances for specific products may include a demand surge, which may be due to market adjustments. Some other factors may consist of supply disruption and industry seasonality (like weather-related or seasonal celebration cases). The seasonal adjustment of economic/time data plays a vital role in the analysis of general trends, including inventory. Seasonal adjustment is a technique employed in the analysis of economic data towards tackling fluctuations that may result from seasonal factors. In cases where results show an impending surge in demand, you can implement an inventory increase plan to maintain your product balance.

5-    Buffering for Holiday Period

A significant observation from my experience in supply planning is finding short supply during crucial holiday periods despite being aware of upcoming events. A shortage of inventory affects customer service drastically and adds a significant increase in price – which contributes to customer frustration. It may also affect your overall brand image and profit earning prospects projected for the period. Supply Chain Planning can be made for different levels and time horizons, so consideration for an increase in inventory becomes necessary to cover higher lead time to process. Key holiday seasons like the Christmas Holidays, Chinese New Year, and the Summer Holidays are times when an increase in inventory would be considered helpful to offset potential supply shortages.

Continue reading the full article here.