If independent demand from the customer is constant and is 100% predictable then the organisation will only require sufficient inventory to meet this demand.
However demand is never predictable and additional inventories are required to compensate for:
- Unforeseen sales demand variations that cannot be met by production re-scheduling; customer service levels can be maintained from reserve inventories; and/or
- Supply uncertainties from extended supplier lead times or unreliability; demand can be met from safety inventories, so avoiding delays in delivery to the customer.
This means that inventory requires close control and monitoring. Any major discrepancy between what is actually held as opposed to what the “system” shows can have a major impact on the business; one not being able to satisfy the customer demand.