Four of the most important reasons for holding inventory are:
- Meeting customer demand quickly
- Buffering against unexpected demand surges – or planning for seasonal demand
- Taking advantage of dropping prices
- Hedging against future purchase price increases
Below we go into more detail about each of these reasons for holding stock.
Reasons for holding inventory: the details
Inventory is considered to be one of the most important assets of a business. Its management needs to be proactive, accurate and efficient. Whilst holding either too much or too little inventory places a burden on both productivity and profitability, it is still essential for most businesses to hold a sufficient quantity of inventory at all times.
The primary objective in terms of holding inventory is to ensure that customer service targets can always be met without compromising cash flow or running out of stock. When customers cannot purchase what they need, when they need it, they often cease to be customers. Losses as a result of missed sales, customers jumping ship to a competitor, or paying holding costs on surplus stock that is no longer in demand is what drives many businesses into the red.
Inventory managers are constantly refining their supply chain operations in a constant and never-ending bid to attain optimal stock levels. This is because any decrease on the costs associated with inventory – ordering costs, storage costs and shortage costs – leads to improved profitability, access to more working capital and the ability to capitalise on opportunities as they arise.
That being said, what inventory and how much of it a business chooses to hold are of vital concern. There are a number of factors that influence a business’s decision to hold inventory.
Expecting the unexpected
By far the greatest adversary any inventory manager is expected to overcome is fluctuating consumer demand. A business’s priority should always be being able to meet its customer service targets. This means being able to supply its customers with the goods and services they want exactly when they want them.
The successful business is the one that is able to draw upon accurate, real-time inventory level data, forecast future demand with a high degree of accuracy, and ensure timely purchasing of relevant goods so that they can be supplied when demand spikes.
Businesses should always hold enough stock to be able to meet unexpected spikes in consumer demand, but not so much that an overstock issue arises. Navigating this fine line between ‘just enough’ and ‘too much’ is an ongoing challenge process that managers struggle to overcome year in and year out.
A good stock control software system, that keeps track of inventory in real-time, is a must for businesses seeking to ensure that their inventory levels are up to the task of meeting unanticipated surges in demand.
A time to buy more inventory
Typically, most seasonally affected businesses will choose to hold more inventory during peak seasons or event periods – such as during summer or for Christmas, Halloween or Valentine’s day.
In order to meet seasonal demand many industries – particularly the fashion industry, for example, or medical manufacturers dealing with seasonal illnesses – require purchase orders to be placed months in advance. So for example, a business looking to stock its inventory for the coming winter seasons will need to order its goose down coats up to eight months in advance.
Capitalising on low cost offers
From time to time manufacturers or suppliers will offer massive closeout or spot offers with highly attractive discounts. Lower buying costs for the business amounts to lower selling costs to customers. This pulls in and wins over new customers, as well as offers the business a distinct competitive edge.
In order to be able to capitalise on low cost offers however, a business must have the necessary working capital available. The amount of working capital available to the purchasing department is directly linked to the amount of current inventory on stock.
If a business’s cash flow is tied up in excess storage costs it will find itself in the unenviable position of sitting on the sidelines as its competitors scramble to secure the low cost offers on hand.
Of course, the irony is that if a business falls prey to over-capitalising on a low cost offer it will be stuck with an overstock issue, tying up its cash flow and rendering itself unable to capitalise on any future opportunities that may arise.
Putting on bottom-line body armour
Consumer demand is not the only factor that fluctuates. The market price of goods is also susceptible to a complex array of variables – some predictable, others not. This degree of uncertainty in the market value of inventory is what leads businesses to hedge their risk against sudden price increases in the market.
It is a risky strategy because it could very easily leave a business holding unnecessary levels of stock – thereby raising holding costs – in a hedge against possible price increases in the future. But if the market actually drops and the value of goods plummets, businesses holding stock hedged against price increases will lose a lot of money in a very short space of time.
Overall, the success of a business hinges upon how effectively its inventory is managed. The key is to ensure that optimal stock levels are maintained both to protect against sudden and unexpected surges in demand and market prices without over-compensating and holding excess inventory.
A powerful and effective solution lies with inventory management software. Capable of keeping track of inventory throughout every stage in the supply chain in real time, inventory managers are able to access, analyse and forecast inventory needs with accuracy.
