• Ed Tidmarsh

The Law of Dysfunctional Inventory Equilibrium

Even with modern inventory management systems customer service targets are usually not fully met. This is potentially a career-limiting phenomenon for many inventory management specialists. Important irate customers can even lead to employment termination for the unfortunate inventory management specialist!


The safer option for inventory managers is to inflate stock levels and just live with the grumbles about low stockturns from Finance and others.


Therefore, the inevitable response to this service problem, strongly supported by marketing and sales, is to raise inventory levels. However, in the absence of granular risk-linked inventory levels and re-order points it becomes very difficult to know exactly where to raise the inventory levels. Under these conditions more broad-brush approaches are usually employed. For example, all inventory levels for a class of products are arbitrarily lifted, or sometimes an entire location’s inventory levels are similarly raised.This may fix some of the customer service problems but probably not all of them. Stockturns now decline and some customers are still unhappy.


Having observed this problem-response phenomenon many times over the past decades, we have formulated the following (somewhat tongue-in-cheek) inventory investment law:


THE LAW OF DYSFUNCTIONAL INVENTORY EQUILIBRIUM


Where the origins of inventory risk and process instability are not well understood and managed with appropriate investment instruments and discipline, inventories will rise and customer service will decline to an equilibrium point, where customers are barely satisfied with their service levels and stock-turns are barely tolerable.  At this point inventory levels reach a state of dysfunctional stability which, with mere variations on the theme, is perpetuated into the future by approximately equal counter-balancing antagonistic vested interests.


Seen from a political perspective there are two opposing teams at play here and the two “teams” usually comprise the following team members:

  • Team 1 'For Stock': Sales, Marketing, Production & Logistics

  • Team 2 'Against Stock': Finance, CEO, Shareholders

In practice it seems as if the “For Stock” side usually wins the contests. As was mentioned, the more or less predictable outcome is that stockturns decline and some customers are still unhappy. In almost every respect this type of solution is not an inventory optimization solution. It is more of a political compromise.


True optimization will require granular risk models for each and every line-item at every stocking location where the inventory levels are directly linked to the line-item risk profiles and the associated target service objectives.

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We don't believe that Inventories and Supply Chains are a necessary evil. We know, if understood correctly, they implement strategy and are vital high-yield investments which can provide the strategic leverage needed to succeed. We continually work to expand current supply chain thinking and we absolutely love the challenge. 

About ICS

Computing supply and demand risks at SKU-level which are inherent to any stocked item combined with sophisticated forecasting models has been a game changer in inventory management. Uncovering those risks enables informed decision making and provides companies with undiscovered opportunities to achieve the desired capital and service level requirements.

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