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ChainLink Research, a think tank and consulting business based in suburban Boston, has developed models to display what happens when inventory is under supplied or over supplied.
In the under supplied model, the provider runs out of stock three times in five weeks. The opposite model shows what happens when there is more inventory than necessary. When interest rates are low, the cost of oversupply is manageable. Yet when the pandemic caused panic buying oin 2020, oversupply became an excellent strategy. The toilet paper shortage was not caused by any change in consumption, but rather due to panic buying which is almost impossible to predict.
Items such as sanitizers, masks and gloves experienced unprecedented surges in consumption.
Smart distributors learn to monitor key indicators that will influence demand for specific products. It is common to provide the right amount of inventory across the whole enterprise, but in the wrong places. In this situation, there is oversupply at one location and under supply at another.
Up-to-date inventory visibility is absolutely essential. In some cases, a distributor may demand visibility of inventory held by his vendors, product that it does not yet need but may wish to acquire. In this situation, the distributor not only needs to know where the inventory is, but how fast can be delivered.
In general, the more inventory a company has, the higher the service level. However if it is the wrong inventory at the wrong location, that theory falls apart. While better inventory management will maximize margins, some distributors will follow a policy of never running out of stock. This is particularly valuable when the consequences of running out are high, such as hospitals consumption of medications and equipment.
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