A year ago, lean was the name of the game in supply chain management. Companies were focused on reducing the total inventory wrapped up in their supply chains to free up working capital and to reduce inventory cost. With the advent of COVID-19 this year, many companies began to realise the risks associated with being ultra-lean. Lean supply chains are typically more vulnerable to disruption. They simply cannot maintain service to customers when disruption strikes.
So if you are thinking about beefing up your inventories to be more prepared for the next disruption, what are the associated costs? Here is a breakdown of inventory carrying cost:
Increasing inventory will have additional cost impacts on labor costs and working capital. If you do choose to increase your inventories to be better prepared when the next disruption strikes, do not forget to account for these indirect costs associated with increased inventory!
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