What are the costs and benefits of maintaining inventories? What does this tell you about the movement toward just-in-time systems?

The costs of maintaining inventories include the cost of the capital used to purchase them; the cost of ordering them purchasing, transportation, receiving, inspection, and accounting; and the cost of storing them including warehousing, handling and data management, insurance, and shrinkage.

A merchandising company generally requires inventory so it has something to sell when a customer comes into the store or places an order. In a manufacturing company, the traditional benefit of carrying inventories is to decouple the purchasing, manufacturing, and sales processes, so each can run at its own optimal pace. Today many manufacturing companies are discovering another category of cost to maintaining inventories, inefficiencies in production processes that are masked by the ability to put defective inventory aside and rework it later.

These costs can be so great compared to the other costs of maintaining inventories, that they have led to a rethinking of optimal inventory policy. Today, many companies have adopted some form of just-in-time manufacturing, in which raw materials inventory arrives immediately before entering production, work-in-process is kept to an absolute minimum, and finished goods are shipped as soon as they come off the line. Companies are establishing customer-supplier alignments, often with a single supplier for each item, to insure the quality and on-time delivery of raw materials. They are re engineering their production processes to remove defects and build inspection in to every step on the line.

Many companies no longer produce to a plan, but only to customer orders to minimize finished goods. These companies, where the traditional benefits of inventories are no longer needed or even wanted, see no benefits any more to paying the costs.