Though reducing inventory is generally advisable special situations arise when stocking inventory makes good business sense
Certainly reducing inventory on hand is typically preferred as you can accelerate your cash flow. It is one of the key focus areas of my consulting practice. I have found that reducing inventory by 50% is typically quite achievable with the optimal mix of people/skills, processes and systems. Keeping money flowing is one great way to improve your business results. However, it is never black or white. There are times when increasing inventory is my recommendation!
The best practice process should not dictate low inventory levels for the sake of having low inventory levels. If it does, throw out your best practice process. I see this most often arise when implementing Lean programs. According to Lean, inventory is a waste. Thus, many people take this as black or white and reduce inventory regardless of how it fits with the company strategy and requirements. Don’t blindly follow what seems to be a generic rule! Lean doesn’t not consider inventory a waste if it has a value.
There can be a purpose and value for inventory. For example, if you have customer volatility, you will need to cover for that volatility if you want to keep your service levels intact. Of course, you should also collaborate and partner with customers to reduce volatility. As volatility is reduced, inventory can be successfully reduced. However, unfortunately I’ve come into several clients with horrific service levels because they followed a mandate to slash inventory without a plan of how to accomplish this goal successfully.
Uneven demand is another reason inventory is required. Inventory can help level load production which is not only required to manage costs but, more importantly, if the uneven demand requires more capacity than is available at certain times, customer service will be impacted. Lean understands this as well; however, I often see this ignored when implementing Lean.
Last but not least, inventory can be of value for any number of reasons that makes sense for the business. For example, in one client, we wanted to increase inventory levels so that we could reduce turnover. Turnover can cost between 16-250% of the cost of the employee in lost productivity, training, reduced efficiencies, etc. If we could keep employees with a level load and offer options for time off during the grueling, hot timeframes, turnover improved.
Don’t make black and white statements without understanding the impact. I’ve witnessed too many clients calling me in to help resolve angry customers, higher costs and the like solely due to following a typically great, generic rule like reducing inventory is always good.