What is the best inventory strategy to manage the risk of a supply interruption? Will the COVID-19 pandemic change our minds about the wisdom of continually driving down inventory targets to reduce working capital costs, especially during the last quarter of the fiscal year?
During the hurricane season of 2005 that included Katrina, chemical plants located far away from the hurricane center were shut down because they were dependent on raw materials that were manufactured near the Gulf Coast. In the aftermath, many of the affected companies evaluated their risk to future events and developed seasonal strategies that were triggered each year with the start of the hurricane season. Inventories are increased during this time period, and put it in warehouses away from the coast if possible. Systems have been implemented for monitoring and communication methods deployed to detect early signs for improving the reaction time.
Setting Inventory Targets
Will there be a similar reaction to the current Coronavirus pandemic? When we have the meetings to determine what we can learn from this, will inventory targets come up? A survey of news stories to date indicates our thinking has evolved as the crisis developed. In the early days, there was talk of regional uncertainty. Were we wise to rely so heavily on China for sourcing? But quickly the crisis spread from country to country until it was everywhere. It is hard to develop a mitigation plan for a global risk that shuts down entire economies.
Will the plans that come from those meetings be short term exercises, or will they create a lasting impression deep within our business culture? A clue may come from the hurricane plans that are now 15 years old. In time, memories faded, personnel and management changed, and these plans largely fell by the wayside.
Maybe what we should strive for is that we use this experience to justify the time and effort it will take to thoroughly evaluate the risk of our supply chains in our businesses. Inventory strategy should be part of that discussion. Define critical raw materials and then work to understand the full supply chain back to your suppliers and to their suppliers so that you can more completely understand the risks. Develop long lasting strategies that mitigate risk and are cost effective. A little extra inventory may be the right strategy if it can get you through a short-term crisis or give you the time you need to implement an alternate supply strategy.