Making the decision whether or not an enterprise invests in carrying inventory brings with it major implications for the cost structure and working capital requirements. If a business has to, or chooses to, invest in carrying its own inventory then, along with that decision comes complexity and risk as well as the need for an allocation of capital to pay for the inventory.

There is an opportunity cost associated with every business decision involving the allocation of capital. What is spent on inventory cannot be spent on updating and deploying a fully integrated information technology platform. Hiring a supply chain manager to try and forecast requirements and manage the inventory, achieve required service levels while attempting to minimize tying up excess capital and risk of obsolescence, may mean forsaking a digital marketing manager that could be nurturing new customers and developing valuable web traffic.

If a business enterprise is involved in manufacturing, then there’s no option except for it to carry inventory – both in raw materials and in finished goods. In order to decide how much inventory is needed the enterprise must rely on a sales forecast. Relying on a sales forecast is inherently risky as it can never contemplate all potential changes and risk of change.

Depending on what the raw material and finished product manufacturing lead times are will affect how far out into the future an enterprise has to rely on the forecast for making working capital commitments. The further out into the future then the less accurate the forecast will be, leading to increased risks of inventory obsolescence.

Technology can be used to reduce this risk. Customers may provide actual inventory on-hand and sell-through data to the enterprise in order they can forecast future demand more accurately. As more and more items join the “Internet of Things” and are directly connected providing detailed data on consumption then the information can also be used for more accurate forecasting. However, in order to do so, investments have to be made in technology and human resources to gather and interpret the data in order to make it useful.

Investing in an Enterprise Resource Planning (ERP) system with material planning (MRP) capabilities will also be unavoidable for a manufacturing entity. Establishing Bills of Materials (BOMs) for all its products along with lead times for the individual components and tying all this into the inventory management system along with vendor lead times are additional costs that will necessarily be incurred to competently manage the supply chain.

For a reseller enterprise that is able to operate as a “virtual” business the risks associated with carrying inventory can be eliminated along with the allocation of capital and operating expenses that would otherwise be tied up in the warehouse. Technology can be utilized to tie into manufacturers and distributors inventory in their distribution centers. Re-sellers can deploy their e-commerce site showing inventory availability leveraging what’s available at their suppliers’ facilities rather than their own.