Risk and Reward: Managing Inventory in an Uncertain Environment

With global supply chains facing ongoing disruptions, particularly from geopolitical uncertainty around key trade routes such as the Strait of Hormuz, even businesses that are typically asset-light are returning to holding inventory as a buffer against delays and disruption.  

But inventory is not free insurance. Buffer stock can help businesses protect against longer lead times and unpredictable demand, but it becomes a cost (and risk) when stock exceeds what the business can effectively use.  

The challenge is to strike the right balance between useful buffers and excess stock that creates financial and operational pressure. This is especially important when port congestion may lead to further delays and supply chain disruption is increasingly viewed as a lasting feature that must be accounted for in financial planning.

Phil Dearth, Regional Vice President, NAM and LTAM at APL Logistics, shares his perspective on the risks and rewards of inventory buffering, and how businesses can make sure buffers deliver the best value rather than becoming a liability.

The Often Overlooked Costs of InventoryOften Overlooked Costs of Inventory

The value of holding inventory buffers during uncertainty is clear: they offer the flexibility to meet customer demand even if a shipment is delayed or complications arise.  

Yet excess inventory ties up cash that otherwise could have funded growth or simply strengthened liquidity. Every increase in the “days inventory outstanding” metric lengthens the cash conversion cycle and keeps cash tied up, increasing financing pressure.  

The longer items sit in storage, the greater the risk of market shifts or expiration. This can lead to downstream margin erosion through forced markdowns to clear old stock. These forced sales cycles may even have knock-on reputational risks if products must be sold through outlets not aligned with the brand. And when businesses have to increase storage space and labor to expand capacity, there is more pressure on payments and procurement and operations may become congested and inefficient.

There are also costs that can be overlooked when making the decision to buy or move goods too early. Companies may face unnecessary premium freight surcharges and additional costs on rush orders, or incur extra demurrage and detention fees when cargoes exceed their allowed free time, a particular concern as port congestion increases.  

In other words, decisions to protect service levels introduce different operational pressures. Dearth suggests that this means the conversation should move away from how much inventory is worth holding toward what inventory is worth holding at all.

Not Every SKU Needs the Same Treatment

Additional protection may be warranted for products with long production lead times or limited sourcing options, high margins or high costs associated with lost sales, in-demand lines, or critical materials. Additional protection may also be justified when there are significant consequences or penalties if products go out of stock.  

That won’t be true of every product in a business’s lineup. This is where understanding the business’s particular market and products is essential. With that insight, companies can decide where holding additional inventory is the best solution and where supply chain flexibility can provide an alternative buffer.

As Dearth notes, “Rigid capacity or production times, predictable customer demand, and high impacts from stockouts or low inventory all make buffers make sense. Conversely, just-in-time models still make sense where there is optionality in production.” This might include quick production adaptations, multiple vendor options, local or nearshored sourcing, higher SKU volatility, or the ability to use postponement strategies such as hold-at-origin.

With a more targeted approach, businesses can avoid the unnecessary costs of broad overstocking while protecting products where holding additional stock yields the greatest value.

Treating Inventory as a Supply Chain Decision, Not Just a Safety Net

Dearth stresses that knowing where to buffer in the face of uncertainty depends on actionable data, not simply more data. “Reactive supply chains almost always drive higher logistics costs. Data that instead facilitates proactive decision-making, supported by scenarios that have already been modeled and planned, is key.”  

However, he adds that companies that have front-loaded too much inventory do not necessarily have to accept it as a sunk cost. Inventory can, for example, be rebalanced across distribution centers, especially if transferring stock would be more cost-effective than replacing it. Likewise, promotional activity, such as pairing slow-moving SKUs with faster-moving ones, can help accelerate sell-through.

Supply chain leaders can do little about the uncertain environment they now operate in. But resilience doesn’t have to come from holding everything “in case”. When businesses understand where inventory adds value, and where flexibility is the better buffer they can adjust their approach as conditions change without overreliance on holding stock at the expense of operational efficiency.

APL Logistics is here to support our customers with greater visibility at the SKU level and flexible solutions to ensure inventory moves as efficiently as possible. Feel free to chat with our team today.

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Disclaimer: This article is issued for general information purposes only. APL Logistics accepts no responsibility for any information contained within this article and disclaims and excludes any liability in respect of the contents or for action taken based on such information.