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The Tip of the (Inventory) Iceberg

While most retailers focus on the inventory that is visible in their stores and distribution centers, too few pay attention to the hidden costs of high inventory.

By ·

As every sailor or fan of the movie “Titanic” knows, it’s not the tip of the iceberg that gets you; the real danger is the ice hidden below the water’s surface. Even though you navigate around the visible ice, the hidden ice can still sink your ship.

High levels of inventory can have the same effect in the retail supply chain. As a Kurt Salmon analysis noted, most retailers carry anywhere between 20 to 40 percent surplus inventory. The reason for this build up, in our experience, is that retail professionals are convinced that if they have inadequate inventory for customers, their businesses are bound to fail. In order to avoid such possibility, the mantra of “keep it filled” conveniently becomes the platform for a second objective of “buy it cheap.”

The failure to manage inventory and contain this surplus becomes the source of what we call hidden costs. These are not the typical costs like inventory carrying costs. Instead, they are costs that do not get associated directly with inventory, but are caused by moving, storing, and handling excess inventory in the enterprise. They affect an organization’s profitability and productivity. What’s more, they could have been avoided by better inventory management.

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As every sailor or fan of the movie “Titanic” knows, it’s not the tip of the iceberg that gets you; the real danger is the ice hidden below the water’s surface. Even though you navigate around the visible ice, the hidden ice can still sink your ship.

High levels of inventory can have the same effect in the retail supply chain. As a Kurt Salmon analysis noted, most retailers carry anywhere between 20 to 40 percent surplus inventory. The reason for this build up, in our experience, is that retail professionals are convinced that if they have inadequate inventory for customers, their businesses are bound to fail. In order to avoid such possibility, the mantra of “keep it filled” conveniently becomes the platform for a second objective of “buy it cheap.”

The failure to manage inventory and contain this surplus becomes the source of what we call hidden costs. These are not the typical costs like inventory carrying costs. Instead, they are costs that do not get associated directly with inventory, but are caused by moving, storing, and handling excess inventory in the enterprise. They affect an organization’s profitability and productivity. What’s more, they could have been avoided by better inventory management.

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Inventory Management · All Topics
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