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Inventory, Reimagined

How companies should be determining their ideal inventory level in the current economic climate.

By Amit Goel | March 02, 2023 at 04:47 PM
stock illustration: businessmen pushing levers with inventory surrounding them

Before the pandemic changed organizations’ approach to inventories, conventional wisdom tended toward a just-in-time (JIT) mindset, which enables companies to adjust inventories in real time to accommodate immediate demand. Made possible by predictable supply chains, JIT inventory management optimizes investment in working capital while minimizing cost of carry.

Beginning in the second half of 2020, however, a number of factors began to converge to disrupt this time-tested system. The pandemic caused serious disturbances in the global supply chain, organizations were unprepared to meet new and unprecedented patterns in consumer demand, and shortages became commonplace as producers and shippers struggled to keep up. Further compounding the challenges with using the JIT approach, companies reacted to rising prices starting in the second half of 2021 by stockpiling inventories to hedge against future price increases. And geopolitical turbulence—such as the conflict in Ukraine, beginning in early 2022, and persistent Covid lockdowns across Asia—presented further headaches for corporate treasurers seeking to optimize inventories in pursuit of a strong balance sheet.

Although a number of these factors are still at play, relief may be around the corner for corporate treasurers. Global economies seem to be inching toward a post-pandemic “normal,” which might present new opportunities to normalize inventory levels and optimize working capital.

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