Inventory demons lurking in the depths

Everyone–ok, most all supply chain professionals and a fair number of business folks–know that inventory costs money, that one should minimize inventory, or better yet let someone else own it.  But there are some hidden demons lurking that can spill additional oil onto the Gulf, so to speak (for old Zeb’s thoughts on “Who productized that there oil well?” see http://zebulonsolutions.com/zebsblog/?p=43).

For example, let us think a little about a favorite trick–let someone else own the inventory, aka supplier managed inventory or some such.  This in general seems like the perfect solution except that those who will accept this tend to also want some fine print in their contract basically saying “if the inventory I own for you becomes excess or obsolete then you own it, dude.”  Understandable, and during fair weather this is a pain unfelt.  But come a storm, then besides the root cause problems–market demand downturn or whatever–you now have a sudden, unplanned cash hit to pay for that E&O inventory.  Furthermore, if trouble is over the horizon and said inventory is not on yourbooks, there is a tendency to manage it less aggressively.  As long as it’s someone else’s money / inventory, there is less incentive to think abot it / worry about it / take steps to mitigate the said risk.  Out of sight, out of mind.  Until a fell wind blows. And E&O is not the only demon here–similar issues pop up if you have the good fortune to have an upside but your supplier managed inventory is minimized or their lead times are stretched. 

The answer here is not to avoid supplier managed inventory but to remember that you need a partner who is as aggressive as you and on the same page as you in terms of managing inventory and risk, and you need to keep in mind how much you have not only on your own floor, but also in your partner’s warehouse and in their pipe.  Cause that demon may yet rise from the ocean depths and eat your oil well if you are not careful.

Chuck

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