8.1 Why Inventory Management?

In 2001, Cisco Systems, an American multinational technology conglomerate renowned for its networking hardware, software, and telecommunications equipment, faced a significant setback. The company had to write off a staggering $2.15 billion in inventory. A “write-off” in accounting terms means reducing the book value of an asset to zero, indicating it has no future value or won’t generate any future benefits. For Cisco, this was a clear indication of the consequences of having too much inventory.

Fast forward to 2018, the UK faced a chicken crisis. KFC, one of the world’s most popular fast-food chains, ran out of chicken, leading to the temporary closure of more than half of its 900 UK outlets. This incident showcased the challenges and repercussions of having too little inventory. Beyond the immediate loss of revenue, KFC faced potential long-term consequences such as diminished customer trust and tarnished brand reputation.

These two incidents underscore the dual challenges in inventory management: having too much or having too little. Both scenarios present their unique set of problems, but at their core, they highlight the importance of balance in inventory management. While Cisco and KFC serve as notable examples, countless companies across industries grapple with similar challenges. For instance, banks occasionally face backlash when ATMs run out of cash, especially during peak times or holidays. Similarly, airlines might overbook flights, anticipating some cancellations, but when those cancellations don’t materialize, they’re left with the challenge of accommodating all passengers. In the hospitality sector, hotels might either overbook rooms, leading to unhappy guests, or have too many vacant rooms, resulting in lost revenue. Whether it’s overstocking seasonal items, underestimating the demand for a new service, or not having the right resources available at the right time, inventory missteps can be costly and detrimental to both reputation and bottom line.

In this chapter, we will guide you through the intricacies of inventory management, ensuring you’re well-equipped to avoid the pitfalls of having either too much or too little stock in the businesses you join or manage. Such errors, as illustrated by the examples of Cisco and KFC, can have significant repercussions, both financially and reputationally.

To provide a comprehensive understanding, we’ll cover the following foundational areas:

• Role and Types of Inventory: Delve into the various kinds of inventory and understand their distinct roles within a supply chain.
• Why Inventory is Created: Uncover the primary reasons businesses maintain stock and the benefits it offers.
• Costs Associated with Inventory: Familiarize yourself with the different expenses related to holding, ordering, and managing inventory.
• ABC Analysis: Learn this method of categorizing inventory based on its value and importance, helping businesses prioritize their stock management.
• ROP and EOQ: Grasp these essential inventory management formulas that guide businesses on when and how much to order.
• Safety Stock: Understand the concept of safety stock and its role in ensuring businesses can meet unexpected spikes in demand.

By the end of this chapter, you’ll have a solid foundation in inventory management, empowering you to make informed decisions and optimize business operations.