Zero Inventory: A Solution, or a Problem?

This week's reading contains a lot of inventory forecast and calculation techniques. To all the companies, inventory seems like an evil that everyone wants to kill it. But on the other hand, all companies have to keep a certain amount of goods in order to meet their customers' needs. According to the article, inventory could accounts for 40 to 60 percent of a company's asset, which is almost the largest asset on the balance sheet.[1] In financial accounting class, I learned that the more current asset the company has, the more viable the business will be. Thus, minimising the inventory level to the lowest point should be a desired outcome for every company. By doing so, the company can not only reduce the possession and facility costs, but also gain more liquidity for the company to expand the business.

When I went through all the inventory calculating formula, I realised that companies spent a lot of money on forecasting and calculating. Is there any way to say goodbye to all the inventories? Maybe it sounds ridiculous, but is it possible to not have any inventory at all? All these questions lead me to the concept of Zero Inventory.

Zero inventory is defined as:

"A system in which a company keeps no or very little inventory in storage, simply ordering exactly what it needs to sell and receiving it in a timely manner. Zero inventory is the goal of just-in-time inventory management and the two terms are sometimes used to mean the same thing."[2]

The concept originally came from Toyota, with its famous Kanban management. This technique helped Toyota link every single point on the supply chain together as a whole, and reduce the cost significantly. More information about Kanban was clearly discussed and posted by one of our classmate Labale Khan on February 2012. Please visit: Kanban – Just in Time Production.

Zero inventory has certainly brought a huge success to Toyota. But as I kept reading about this concept, there are several doubts that came to mind:

1) It seems only big companies who have dominant power in the entire supply chain, like Dell and Toyota, will have the ability to achieve this goal. For some of these companies, they invited their vendor to build up new factories near their plants so that the delivery time and cost can be largely reduced.[3] But small companies could hardly have the ability to do so.

2) The concept only refer to a zero inventory at a certain point in the entire supply chain. A zero inventory in the middle will put more pressure on its upstream and downstream partners. That is to say, the benefit is actually based on the higher risk of its suppliers. In short term, the cost of suppliers will increase; in long term, this cost will actually be absorbed by the customer (as we know that all the cost incurred in the supply chain will eventually add to the final price as paid by the customer).[4]

3) For some companies,  instead of storing the goods in its own plants, they choose to authorise an agent to take care of the goods in order to achieve zero inventory. However, in this way, the inventory is not eliminated - it's only transferred to another agent's plant.

Above are some of my thoughts about zero inventory. I still have several questions that I would like to discuss with all of you: Can we make any adjustment on this model to make it also applicable for small companies? How can we determine if a company is suitable to apply just-in-time inventory management or not?




[1] Managing Inventories: What Is the Appropriate Order Quantity?
[2] http://financial-dictionary.thefreedictionary.com/Zero+Inventory
[3] http://www.cnbm.net.cn/article/ar220213183_1.html
[4] http://blog.sina.com.cn/s/blog_4a74d9980101dvez.html