| Losing out on revenue due to lost opportunities and dealing with SLA penalties for unfulfilled orders can be costly to any business. The common way to avoid these problems is to add an excess buffer of inventory at all times. This number will vary, but can be reasonably predicted based on the typical range of error that can be measured historically. For this example, let's assume that the supplier has determined that 500K units is a reasonable number to keep in excess supply. This solution works, but it can add dramatic costs to running the business. At $25 per unit * 500K units, that's $12.5 million in idle capital. And even at a low interest rate of 5%, it's a more than $52,000 per month carrying cost for that excess inventory, not to mention the costs of warehousing all this extra inventory while it sits idle and becomes obsolete. Of course, your individual mileage may vary depending on the size and nature of your business. In a manufacturing company the size of Philips, GE, or NCR, or a retail chain the size of Wal-Mart, overbloating the inventory can lead to millions of dollars in lost revenue per year. Despite those drawbacks, this is the way most companies have handled the situation for years. The issue at hand is to understand how to reduce the margins for error, reduce excess inventory, and free up that cash. Industries such as manufacturing and retail work from such high volumes and low margins that even a small percentage of bloat or cost savings in the overall distribution chain can amount to millions of dollars in either direction. |
