“Who should own inventory risk?” This key question has been asked by a number of businesses over the last few years. There are a lot of challenges that go into inventory management, made worse by supply chain shortages, delays, and other challenges to meet increased consumer demand in a variety of industries, many businesses have been forced to keep extra inventory on hand. Additional inventory, however, may mean larger warehouses, more waste, and lower profits for the business. It may also mean considerable risk to the business: by maintaining a higher inventory level, businesses may face additional risk of spoilage, theft, or simply excess inventory as consumer needs change.
Shifting inventory risk to the manufacturer has become an increasingly popular tactic, reflecting many of the trends in supply chain management over recent years.
Manufacturers’ Place in the Supply Chain
Traditionally, manufacturers have borne little of the risk that goes along with maintaining inventory. Manufacturers may, in general, produce large product lots, then pass them on to the sellers. Once they leave manufacturers’ hands, those manufacturers have little involvement in the process. Meanwhile, they try to keep their costs high even during times when retailers may need to lower cost to meet consumer demand or move inventory.
Shifting some of the inventory risk onto the manufacturer, however, can offer a number of potential advantages.
The Benefits of Shifting Inventory Risk to Manufacturers
Shifting inventory risk to manufacturers can ultimately help streamline the supply chain and offer benefits to end customers, retailers, and even those manufacturers themselves.
Slow-Moving Items can Ship as Needed
Instead of shipping items out in bulk and requiring retailers to store them, manufacturers could ship on demand, decreasing the amount of those items spend sitting on shelves and decreasing the amount of spoilage and waste. You can also decrease the time needed to get items to end customers since you can keep inventory at locations closer to them.
Long Lead Times Decrease
Many of the steps in the supply chain process have long lead times, which can lead to long waits for customers. Replenishing stores, especially during busy times, and even preparing for events can be more difficult to arrange. When you shift some of the inventory management responsibility to manufacturers, on the other hand, you may find that those lead times decrease, since inventory can move directly to that final point.
Excess Inventory May Decrease
By shifting some of the responsibility and risk associated with inventory to the manufacturer, it’s possible to reduce unnecessary inventory across the supply chain. This offers numerous advantages to both end consumers and retailers. First, it may help reduce shortages by ensuring that inventory goes where it’s needed, not necessarily to the top buyer or the one who orders first. Next, it ensures that manufacturers have more room to meet demand for key items, rather than producing excess inventory. Finally, it helps offer a more sustainable, environmentally-friendly model that may help streamline inventory needs across the country.
Overstock Declines
For sellers, reducing overstock is critical. Overstock often means a loss at the end of the season. While some items can still be sold, it’s often at a steep discount. In many cases, consumers may purchase items only to have them go bad before they are used, or to forget that they have them before the season to use them arrives. By shifting some responsibility and risk to the manufacturer, on the other hand, retailers can reduce those overstocks, which can mean better overall profits. Retailers can also shift some of those cost decreases to end consumers.
Manufacturers can Focus on Consumer Demand
Often, manufacturers are at the mercy of retailers, rather than being able to keep up with specific consumer demands. Manufacturers may, in some cases, be the last to know about changing demand. First, consumer demand may actively shift. Then, retailers become aware of that shift in demand, often through changing inventory levels. Finally, manufacturers will receive word of that change in demand due to changing retailer orders. Unfortunately, it can take considerable time to either ramp up production or decrease it due to that changing demand. When risk shifts partially to manufacturers, however, it’s much easier to keep up with the consumer demand cycle, leading to lower costs, less waste, and better overall consumer satisfaction.
Sellers Face Less Overall Risk
The current supply chain process is often complicated and filled with risks. Sellers must find goods, including, in many cases, locating multiple sources for the same goods. Once they’re made and shipped, which sellers must often arrange, they must store the goods, often in large warehouses, and keep control over their inventory. Sellers must also manage advertising and selling those items to consumers. If the consumer no longer wants the item or, indeed, in many cases, when there is a manufacturing error, sellers must bear the burden of the return. By shifting some of the inventory risk to the manufacturer, sellers may face less risk in the process.
Reduce Supply Chain Strain
Right now, there is a considerable strain on the supply chain. The truck driver shortage that continues to place a great deal of pressure on businesses across the nation has made it more difficult than ever for many businesses and end consumers to get the products they need. Many retailers are struggling to keep up with demand. By placing some of the risk on manufacturers, however, you reduce steps in the supply chain, increase drop shipping opportunities, and, in many cases, help reduce some of the strain on the supply chain.
The supply chain has existed as it is for some time, with a great deal of the risk falling on end sellers. However, by shifting some of that burden to manufacturers, many retailers, manufacturers, and end consumers can experience substantial advantages. Do you need a more effective inventory management system, including one that can help you manage your regular orders? Contact us today to learn more about how Stock IQ can help you manage your inventory and keep up with your stock needs.
