Business Options
Making the decision (if there's an option) whether or not an enterprise invests in carrying its inventory brings significant implications for the enterprise's cost structure and working capital requirements. If a business has to or chooses to, support moving its stock, then, along with that decision comes complexity and risk, as well as the need to allocate capital to pay for the list.
There's an opportunity cost associated with every business decision involving capital allocation. What's spent on inventory cannot be spent on updating and deploying a fully integrated information technology platform. Hiring a supply chain manager to try and forecast requirements and manage the inventory, achieve required service levels while attempting to minimize tying up excess capital and risk of obsolescence may mean forsaking a digital marketing manager that could be focused on nurturing new customers and developing valuable web traffic.
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Manufacturing Enterprises
If a business enterprise is involved in manufacturing, then there's no option except to carry inventory - both in raw materials and finished goods. The enterprise must rely on a sales forecast to decide how much stock is needed. Relying on a sales forecast is risky as it will never be accurate. Depending on raw material and finished product manufacturing lead times, it will affect how far out the enterprise has to reply to the forecast. The further out, the less accurate it will be and the greater the risk of future inventory obsolescence.
Technology can be used to reduce this risk. Customers may provide actual inventory on-hand and sell-through data to the enterprise to forecast future demand more accurately. As more and more items join the "Internet of Things" and are directly connected, providing detailed data on consumption, the information can also be used for more accurate forecasting. However, to do so, investments have to be made in technology and human resources to gather and interpret the data to make it worthwhile.
Investing in an Enterprise Resource Planning (ERP) system with material planning (MRP) capabilities will also be unavoidable for a manufacturing entity. Establishing Bills of Materials (BOMs) for all its products along with lead times for the individual components and tying all this into the inventory management system along with vendor lead times are additional costs that will necessarily be incurred to manage the supply chain competently.
Virtual Enterprises
For a reseller enterprise that can operate as a "virtual" business, the risks associated with carrying inventory can be eliminated along with allocating capital and operating expenses that would otherwise be tied up in the warehouse. Technology can be utilized to tie into manufacturers' and distributors' inventory in their distribution centers. Resellers can deploy their e-commerce site showing inventory availability by leveraging what's available at their supplier's facilities rather than their own. Instead of paying for inventory in advance, it produces only when sold. Instead of paying for a warehouse, warehouse equipment, and personnel, it leverages the investments already incurred by the supplier. Instead of paying higher freight rates, it gets the supplier to drop ship direct and use its more favorable rates. Complexity, working capital requirements, and operating expenses are all reduced or eliminated.
Conclusions
Information technology should be leveraged in manufacturing or distribution to eliminate or reduce the carrying risk of inventory and the potential for obsolescence. Ultimately, the fittest and most efficient businesses survive, and managing the supply chain for small companies should be high on the list of priorities to minimize potential write-offs. Bottom line - an efficient supply chain and working capital optimization go hand-in-hand.