1Inventory Functionality

From an inventory perspective, the ideal situation would be response capability to manufacture products to customer specification. While a zero-inventory manufacturing/ distribution system is typically not attainable, it is important to remember that each dollar invested in inventory is a trade-off with an alternative use of assets that may provide a better return.

Inventory is a major asset that should provide return for the capital invested. The return on inventory investment is the marginal profit on sales that would not occur without inventory. Accounting experts have long recognized that measuring the true cost and benefits of inventory on the corporate profit-and-loss is difficult. Lack of measurement sophistication makes it difficult to evaluate the trade-off among service levels, operating efficiencies, and inventory levels. While aggregate inventory levels have decreased, many enterprises still carry an average inventory that exceeds their basic requirements. This generalization can be understood better through a review of the four prime functions of inventory.

These four functions-geographical specialization, decoupling, balancing supply and demand, and buffering uncertainty-require inventory investment to achieve managerial operating objectives. While lean logistics has made significant progress in reducing overall supply chain inventory, inventory properly deployed can create value and reduce total cost. Given a specific manufacturing/marketing strategy, inventories planned and committed to operations can only be reduced to a level consistent with performing the four inventory functions. All inventories exceeding the minimum level are excess commitments.