Maintaining low inventory levels is a common logistics and inventory objective for companies. Inventory requires management and incurs costs. Companies typically try to achieve a balance whereby they have just enough inventory to meet current and near-term demand, but not so much that they have excess.
Reduced Holding Costs
Holding inventory has costs. Typical costs include utilities for the space used and labor costs involved in managing the inventory. A grocer, for instance, may have significantly lower utilities costs by using less freezer or cooler space to store refrigerated and frozen inventory. A distributor or retailer would need less labor to manage a smaller level of inventory holdings than it would to manage higher inventory levels.
Smaller inventory levels are also easier to manage. It takes less time to organize and retrieve inventory when there is less of it to put away and get out. This makes the process of replenishing short inventory much simpler and more efficient. This is especially important for companies that have high inventory turnover rates and need to quickly get new products onto the shelves.
More Usable Cash
Acquiring inventory is also costly. In industries with high-priced products, it can get very expensive to carry significant levels of inventory. Instead, by maintaining moderate inventory levels and quickly replenishing as needed, your company frees up cash in the short term to meet other expenses and short-term debt obligations. Plus, if you are replenishing inventory in close parallel to selling it, you are bringing in cash at a similar rate to what you pay it out in for inventory.
Less inventory means more space. Retailers are very concerned with inventory turnover per foot of shelf space. By maintaining lower levels of inventory in each product, they have more room to market and sell more products. Retailers that maintain low inventory levels do not need to allocate as much storage space in the building for extra inventory. This means they have more floor space in which to merchandise and sell products.
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