One of the fastest ways I've learned to make myself unpopular is to tell a company they need more inventory.
In my experience, most leadership teams expect a supply chain consultant to recommend reducing inventory. After all, inventory ties up cash, consumes warehouse space, and appears on executive dashboards. It's visible. Leaders walk through the warehouse, point to a dusty pallet, and talk about the cash sitting on the floor.
So when I tell a leadership team that they don't have enough inventory, the reaction is usually immediate.
"Why would we want more?"
It is a fair question.
The interesting part is that I don't recommend more inventory because I like inventory. I usually recommend it because of the role inventory has been asked to play in how the company operates.
Over the years, though, I've learned that studying inventory alone rarely tells me whether inventory is the real problem. So I ask questions. Lots of questions. I know that before I can recommend more or less inventory, I must understand how the organization is designed to work.
More inventory isn’t always wrong. And less inventory isn’t always right. How do I know what the right amount of inventory is? The simple answer is that I don't.
At least not at first.
I don't know what problems the current inventory is solving.
High inventory may be compensating for long lead times. Or it may be protecting the company from unreliable suppliers, absorbing demand variability, supporting a broad product portfolio, or helping fulfill an aggressive customer promise.
Low inventory may reflect excess capacity or limited working capital.
The same inventory level can be exactly right for one organization and completely wrong for another.
That's why I don't begin by asking whether inventory is too high or too low. I begin by trying to understand why the organization arrived at this level of inventory in the first place. Only then can I determine whether inventory is actually the problem, or simply the visible consequence of something else.
Every organization is the result of thousands of decisions made over time. Some are deliberate strategic choices. Others are responses to growth, customers, competitors, acquisitions, technology, or unexpected events.
Individually, these decisions generally make sense. Together, they determine how the organization actually operates.
I'm not trying to understand every decision. That would be impossible. Instead, I'm looking for a surprisingly small number of executive decisions that explain most of the others.
Those decisions fall into four broad categories.
Customer Promise
Capacity
Operating System
Inventory
First, every organization decides what promises it will make to its customers.
What products will it offer?
What lead times will it promise?
What level of quality, availability, service, and price will customers come to expect?
These promises, along with others, define the business that the organization will operate in the market.
Next, the organization decides how much capacity it is willing to provide to fulfill those promises. Assets, automation, labor, outsourcing, and operating hours all contribute to available capacity.
The organization also defines how work will flow through the business. Together, its processes, people, information, and management systems create the operating system that fulfills the promises.
Finally, the organization decides how much inventory it will carry, and where, to support everything else. In my experience, leaders often treat inventory as an independent lever. In reality, much of the inventory strategy is constrained by the decisions that come before it. That is why I start with inventory, because that is where the tug of war often shows up, even if it’s caused somewhere in the other three areas.
The decisions shaping the Customer Promise, Capacity, Operating System, and Inventory aren't particularly surprising on their own. What becomes interesting is what happens when we look at them together.
At this point, one might expect that once these four groups of decisions have been made, the organization should naturally operate well.
Well, that's not how it usually happens.
I have worked with organizations that had reasonable customer promises, reasonable capacity, a sensible operating system, and a logical inventory strategy.
Yet they still struggled. Not because any one decision was obviously wrong. But because the decisions no longer fully supported one another.
It’s like a table with legs of different lengths. A table doesn't become unstable because one leg is poorly made. It becomes unstable because the legs no longer work together.
Organizations are often the same.
The underlying challenge is that businesses are dynamic. Here’s what happens:
One decision changes.
Then another.
Customer expectations evolve.
New products are introduced.
Capacity is expanded.
Inventory is adjusted.
Each decision makes sense on its own, yet the organization gradually becomes more difficult to operate, requiring more coordination, more workarounds, more management attention, and more overall effort just to keep the business running.
Over time, I realized I wasn't looking at four independent categories of decisions. I was looking at decisions that had to continue supporting one another as the business changed.
I started calling that relationship “fit.”
Here’s what good fit can look like:
If the company promises highly customized products, a make-to-order (MTO) operating system often fits naturally.
If customers expect immediate availability but a product is only manufactured periodically, inventory may be needed to satisfy demand between production runs.
If manufacturing performs best in larger batches, minimum order quantities may be necessary to support that operating system.
None of those decisions is universally good. They make sense because they support one another. When those decisions support one another, the organization spends less energy compensating and more energy simply operating.
Also, when everything “fits,” work just flows through the business as part of everyone’s regular day. Orders are fulfilled through normal or expected processes.
Consider how ordering from Amazon usually works. I submit an order using my phone. Amazon gives me an estimated delivery date. My items are picked, packed, shipped, and show up at my house. I’m pretty sure there wasn't a group of people discussing whether my deodorant should ship from Staten Island or Connecticut, followed by someone calling the warehouse to let them know they needed to add Kari’s deodorant to Kari’s package this week.
Of course, some operating systems are designed to require conversations, judgment, and special handling as part of the regular work. Just like inventory, conversations aren't good or bad. The question is whether people are doing the work required by the chosen design or doing additional work to keep decisions that no longer support one another working together.
When the design fits, people generally know what needs to happen and how to make it happen. It’s pretty boring.
With this picture in mind, once I started looking for fit, I began noticing the same pattern over and over again. Organizations can lose fit while hiding the fact that they have stopped working as well as they once did.
Typically, an organization won’t just stop working. In fact, it continues serving customers reasonably well.
Production keeps running. Orders still ship. The business adapts. But today it requires more effort to accomplish what had once happened naturally. What does that extra effort look like?
Regular meetings to discuss the status and sequence of outstanding orders
Internal expediting of specific orders for “special” customers
Daily schedule updates and changes
Segregating product for customers
Inventory growth
Exceptions and workarounds for one-off requests
Management attention at the order workflow level
Overall, many more conversations.
The organization is not necessarily failing. It is compensating.
Some of those compensations are entirely appropriate. A little more inventory might be less expensive than building another production line. Additional coordination between departments might be far less disruptive than redesigning the operating system.
Leaders make tradeoffs like these every day because they often can't change the conditions creating the need for compensation.
A Planning Manager may see that inconsistent customer promises are creating problems but usually wouldn’t contact a customer to change the promise (though I have seen it happen). This leaves Planning to find a way to fulfill the order in the time they have. If it happens more and more often, Planning may start to plan lighter, leaving room in the schedule to make short lead time orders easier to fulfill.
An Operations Manager may recognize that parts of the product portfolio are difficult or unprofitable to manufacture. They can bring it to their leaders’ attention, but they can’t just decide to stop making it. So they have to figure out how to make it work. They may allocate more labor to the problem product or plan for more downtime. If they track those costs, the product becomes even more expensive. If they don’t, the additional cost may disappear into manufacturing variances, and the company may never see the full impact.
Customer Service may see that limited capacity makes it hard to determine the right promise to make to customers, but they can't resolve the capacity problem on their own. They can flag the problem to their leaders while providing promise dates based on recent orders or other guidelines, rather than standards. Over time, the standards may stop being useful, leaving each rep to develop their own workarounds for their customers.
Leaders make the best decisions they can within the part of the business they are responsible for. Those decisions often seem reasonable and are frequently financially justifiable. Over time, those one-off responses can accumulate.
Usually, it isn’t difficult to find signs of compensation. The vital question is whether leaders recognize what the organization is compensating for.
People are making reasonable decisions with the information they have available. Tensions appear when sticking to one decision makes another decision harder to maintain, so people naturally compensate as best they can. It's only when someone maps the compensations created by all of those individually reasonable decisions that the underlying tensions become visible.
The biggest challenge for many organizations is that no one seems to be responsible for seeing the whole picture and managing the organization's accumulated business design over time. Organizations seem to postpone reconsidering the design only after accumulated tensions begin affecting performance or financial results.
Functional leaders are expected to recommend changes within their areas. They are not expected to possess all of the information or all of the authority required to redesign the business itself. Nor should they.
Changing the business design creates another challenge. For example, a change that makes a process easier to operate in one area may increase effort somewhere else.
Suppose the company promises a two-week lead time. Does that promise apply to every product, or only products sold in the last year? Should the company carry enough inventory to maintain the two-week promise? Or should it reserve capacity for make-to-order products? If it reserves capacity, how much should it allocate, and what happens when that capacity is consumed? Does the next customer get a longer lead time? How long would that be? Who compares the cost and effort of each option? Who decides which option is best for the business?
Someone needs enough understanding of the whole business to define the full range of reasonable tradeoffs and determine which one makes the most sense. Someone else may decide whether the organization will make the change or not.
The reality is that the organization is already making tradeoffs. How do leaders know what they are, or whether they are the best for the business?
Someone, somewhere, has to step back periodically and ask a different set of questions.
Do these four main decision categories still support one another?
Has the business changed?
Has the market changed?
Are today's compensations still the right tradeoffs?
Or has the organization gradually become harder to operate than it needs to be?
Someone has to own those questions and hold the organization accountable for the answers. Cross-functional teams can identify tensions, coordinate responses, and make decisions within their authority. But when a tradeoff crosses those boundaries, the decision has to move to the level of the organization with sufficient information and authority to make it.
It seems that the responsibility should belong to the Executive Office, the level of the organization where the information and authority required to make tradeoffs across the entire business come together. Its role is to ensure someone steps back periodically and manages the organization's accumulated business design over time.
Business design isn't a one-time strategic exercise. It's an ongoing management responsibility.
Organizations never stop changing. Neither should the work of ensuring the organization's business design continues to support the promises it has chosen to make.
If no one does that work, the organization may continue operating reasonably well for a long time. But as the business changes, it may require more compensation to keep it working. Results begin to depend more heavily on the judgment and actions of people who know how to work around the tensions. Those people work harder, while more of their attention is consumed with simply keeping the business running.
Eventually, the compensations may no longer be enough. And when someone who knows how to make the system work leaves, the organization loses both the person and the knowledge they used to hold it together. Incoming employees need the regular process training plus new training in the workarounds. That additional training becomes another compensation requiring extra effort from the people who know how to keep the business running. Documenting the workarounds is another option, but that takes effort too. What was difficult to operate can become unpredictable or stop working altogether.
Regularly reviewing the business design creates different possibilities. Leaders can identify where the design is creating unnecessary effort before compensations become deeply embedded in how the organization works. Some compensations may remain the right tradeoff. Others may be eliminated by changing the underlying design.
This approach can give people back time and attention. Instead of spending their day reacting to problems just to keep the business operating, they can dedicate more time to improving how it works and making the types of changes that prevent tomorrow's problems.
One indication of the level of compensation an organization is carrying is how little time employees, and especially leaders, have left to work on improvements that address potential problems (like tensions in the current business design).
The distinction matters. Current problems demand attention. Potential problems require enough available attention to notice and address them before they become current problems.
And that brings me back to inventory. Looking at inventory as part of the business design doesn't tell us whether more or less is better. It gives us a better question to ask.
Maybe the next time I recommend more inventory, the leaders won't ask, "Why would we want more inventory?" Maybe they'll ask, "What is our inventory trying to compensate for?"
I’d like that.