As consultants, we have seen countless businesses grapple with the age-old question, “how much inventory should you hold?” Get it wrong, and you are either tying up capital in excess stock or risking stockouts that frustrate customers and erode profits. The "correct" level is not a one-size that fits-all figure, it is a dynamic balance shaped by multiple factors.
First, lead times need to be considered. In our global supply chains, delays from suppliers in Asia or Europe can stretch from days to months. For instance, if your lead time averages 8 weeks, you will need safety stock to cover demand during that period. Factor in customs hurdles, and UK businesses often add 20-30% buffer to mitigate risks like port congestion.
Product type also plays a pivotal role. Perishable goods, such as fresh produce for retailers demand minimal holding to avoid spoilage and are based on the same principles of just-in-time (JIT) automotive models inspired by Toyota. Conversely, durable items like electronics or machinery can tolerate higher levels, especially if demand is predictable. Seasonal products, like holiday decorations, require stockpiling ahead of peaks, but overdoing it leads to dead stock and markdowns.
Transportation distances amplify these challenges. Sourcing from distant suppliers increases transit variability, such as weather disruptions on transatlantic routes or fuel price spikes. These can all inflate costs. For UK firms importing from China, longer hauls mean higher freight expenses, pushing towards localised sourcing or larger orders to economise.
Bulk buying often unlocks volume rebates, but weigh this against stock holding costs such as storage, insurance, and obsolescence. Using tools like Economic Order Quantity (EOQ) calculators can give the opportunity to model scenarios. For example, a 10% discount on a £100,000 order might save £10,000, but if holding costs hit 25% annually, it could backfire.
Other variables include demand forecasting accuracy, warehouse capacity, and economic fluctuations. In today's volatile market, with inflation and supply chain disruptions from events like the Middle-East crisis, agility is key.
The sweet spot requires data-driven analysis tailored to your operation, but when achieved can both improve service levels AND reduce costs. If you are a business that would like to optimise inventory, then give Davies & Robson a call.
