Editorial:The 'I' Word

Inventory is in the eye of the beholder.

Inventory gets a bad rap. It sits. It waits. It costs money and takes up space. Storing it and moving it around doesn't add any value.

Casting the most aspersions on inventory are the lean folks. Like one of the "10 Most Wanted" on a poster at your local post office, inventory is one of their "Seven Wastes," which makes it a perennial target for elimination.

Lean people point out that excess inventory hides problems. Just as a receding tide exposes hidden rocks, lowering inventory levels within the four walls of a factory or distribution center exposes problem areas that can then be worked on to improve material flow and overall efficiency.

Still, the most seasoned lean advocates will caution that reducing inventory without addressing demand and supply variability, and any internal capacity issues, is a sure recipe for disappointing your customers. On the floor of even the most lean plants (and on their value-stream maps) you will find "supermarkets" that buffer workcells against supply and demand irregularities. So inventory isn't all bad.

Some IT folks also have it in for inventory. They like to say that accurate, real-time information can replace inventory in warehouses, in factories and in transit. Dell Inc. (Round Rock, Texas) is their poster child. They herald the company's supply-chain prowess that allows it to push inventory carrying costs back onto suppliers' books, paying for parts weeks after it has delivered computers to customers, as well as its ability to shape customer demand based on component and product availability.

But as those who have tried it will tell you, Dell's business model doesn't work for every business or industry. The vast majority of goods cannot be built to order. Dell itself has struggled in the retail channel. The last time you walked into a store that was out of what you needed right then, or shopped online at a web-site that reported a six-week delivery time, did you feel any better knowing such information? What we learn, when we eventually find what we are looking for, is where to take our business next time.

Few things in fact will drive sales and marketing people more bonkers than empty slots on store shelves, selling a product that cannot be delivered or cash-in-hand customers ready to buy something that's out of stock. For them, inventory isn't a line item on the balance sheet, but insurance against potential lost sales.

The point here is that a knee-jerk negative reaction to inventory isn't always appropriate. Sure, inventory has to be actively managed. That's why companies like Gillette have people whose job it is to optimize safety stock levels for each SKU at each point in the fulfillment chain (See the Network Optimization story starting on page 18). As long as there is supply and demand uncertainty—until we figure out a way to prevent hurricanes and come up with 100% accurate sales forecasts—companies that make, ship and deliver goods will need inventory buffers and safety stock.

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