Inventory levels dictate business productivity, revenues, and growth. This is especially true in business organizations whose sales revenues directly depend on production or manufacturing. Inventory management aims to optimize inventory by preventing stockout while minimizing inventory costs.
Inventory levels relate to productivity targets, cost targets, and supply chain management, among other business factors. Through these factors, low inventory can present problems in business organizations. Therefore, best practices in lean inventory management include keeping inventory low enough to support cost targets, but not too low to cause instances of low productivity.
Business Impacts of Inventory Levels
Inventory proportionality, in an ideal scenario, requires minimizing inventory and matching the inventory levels of all raw materials and intermediary (work-in-progress) materials. This ideal scenario ensures sufficient business capacity for meeting demand and productivity targets. In meeting demand, the business organization needs sufficient output (finished goods inventory) levels that match customers’ demand. On the other hand, business productivity targets depend on the adequacy of raw materials inventory and intermediary materials inventory to support the company’s strategies for business productivity, development, and competitiveness.
Finished goods inventory and market demand should match in an ideal business scenario. In many cases, companies have buffer inventory or buffer stock to accommodate spikes in market demand. E-commerce companies and big-box retailers, such as Walmart, Home Depot, Aldi, Costco, and Amazon and its subsidiary, Whole Foods Market, are known for effective inventory management that meets market demand and efficiently responds to market trends. These retail firms’ growth and organizational size indicate the complexity and effectiveness of their inventory management practices.
Similarly, raw material inventory levels should match productivity targets to ensure that the business organization develops according to its strategic plans. These productivity targets directly relate to business growth milestones, such as for manufacturing capacity and sales revenues. In the case of automakers, such as Tesla, Ford, General Motors, BMW, Toyota, and Nissan, as well as motorcycle manufacturers, like Harley-Davidson, raw material inventory levels affect the business capacity to manufacture vehicles. These companies source and purchase raw materials based on production targets and market forecasts.
Low inventory levels can reduce productivity, make the business slow down, and reduce its revenues. At the restaurants or store locations of McDonald’s, Starbucks, Burger King, Wendy’s, Subway, Hard Rock Cafe, and other foodservice firms, managers proactively prevent such an effect of low inventory. Considering that these companies need to prepare food at around the time it is ordered, inventory directly relates to productivity, sales, and profits. For example, low inventory of ingredients at a fast-food location can lead to low productivity and even the halting of operations while the location waits for new or additional supplies. In some cases of low inventory, restaurants may indicate on their menu that a certain food product is temporarily out of stock or not available.
Low inventory impacts the online services of IT companies differently, depending on their business focus or the business area in question. In many cases, input inventory for online services includes servers and computing components and related IT assets. Such are the cases of the online services of Apple, Google (Alphabet), Microsoft, Amazon, Facebook (Meta), eBay, and IBM. In the unexpected and extremely rare possibility of low input inventory in these cases, business impacts could include slow services or even denial or unavailability of services. Consequently, such low input inventory could lead to major losses in revenues.
In consumer electronics business, low inventory leads to the inadequacy of inputs for manufacturing processes and the stockout of finished products. Many of the above-mentioned IT companies, as well as Samsung and Sony, have consumer electronics products with global demand and distribution that directly depend on inventory levels. In the case of low input inventory, these firms could suffer from halted production operations. When low inventory of finished goods happens, these companies could experience delays in distribution, sales, or deliveries of their consumer electronics. These products could also become temporarily unavailable until the finished goods inventory reaches adequate levels that match market demand.
Technology and Inventory Management
Information technology solutions can optimize inventory for business organizations. These solutions include systems that businesses purchase and implement as part of their IT assets. Some IT solutions for inventory management also involve online services from providers that specialize in IT for business organizations. When implemented to comprehensively address inventory management and related business areas, these IT solutions can automatically monitor inventory, detect issues, or forecast possible issues. These functions are tools that business managers can use to optimize inventory levels.
References
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