Inventory Optimisation Myths Costing You Control & Agility

Inventory Optimisation Myths Costing You Control & Agility

You’ve likely heard the claims: “less inventory equals efficiency,” “spreadsheets still do the job,” or “Lean means eliminating all buffers.”

They sound convincing. Logical, even. But they’re dangerously misleading.

In boardrooms and planning meetings alike, these myths shape inventory strategies that look tidy on paper—but crumble under pressure. Stock ends up in the wrong places. Critical parts run dry. Recovery becomes a scramble, not a strategy.

The truth? These assumptions are costing you more than you realise—in missed opportunities, eroded margins, and fragile service levels.

This article uncovers what really drives misalignment, and how to shift from reactive firefighting to proactive control—using inventory as a lever for agility, not a liability.

If your inventory strategy feels stretched, static, or just slightly off—this one’s for you.

Key Takeaways:

• Inventory optimisation is not about holding less—it’s about holding what matters, where it matters, based on service value and cost-to-serve models.
• Insufficient inventory driven by overzealous cost-cutting leads to fragile operations and unmet customer commitments. Segmentation is critical to avoid understocking high-impact SKUs
• Poor inventory optimisation ties up 20–30% of working capital and erodes margins through 20–25% annual carrying costs—without enhancing service or agility.
• Many businesses mistake observation for optimisation—true control demands an enterprise-wide mandate with clear governance, shared KPIs, and integrated planning.
• Spreadsheets feel safe but can lead to costly decisions. Static data leads to delayed action, and missed demand signals that reactive teams can’t catch up with.
• Lean principles are misapplied when necessary buffer stocks are stripped away. Strategic buffers are not waste—they protect flow and absorb volatility.
• Scenario planning and SKU segmentation help leaders simulate trade-offs before making cuts, avoiding service damage from unmodelled inventory reductions.

The Consequences of Poor Inventory Optimisation

When it’s overlooked or poorly executed, the downstream impact across capital, operations, and customer satisfaction is immediate—and costly.

Financial Implications of Poor Inventory Optimisation in Supply Chains

• Working Capital Locked in Excess Inventory: Across capital-intensive B2B sectors, 20–30% of working capital is routinely trapped in surplus stock. This constrains the organisation’s ability to invest in innovation or scale strategic initiatives. With inventory optimisation in supply chains, capital can be reallocated to fuel transformation and growth. Source: McKinsey & Company.

●      Escalating Inventory Carrying Costs: Carrying costs—covering storage, insurance, depreciation, and obsolescence risk—typically absorb 20–25% of total inventory value annually. Without rigorous inventory optimisation techniques, these overheads compound silently over time, eroding margins and masking inefficiencies in warehouse and distribution centre operations. Source: APICS, Zipdo.

Examples of Operational Impacts related to Inventory Optimisation

●      Maintenance Delays and Asset Downtime: Poor visibility into MRO (Maintenance, Repair, and Operations) stock is a leading cause of unplanned equipment downtime—accounting for up to 10% in large-scale manufacturing. These disruptions cost millions annually in lost output, reactive maintenance, and asset underutilisation. Source: Innovapptive.

●      Planning Disruptions Caused by Data Inaccuracy: Inaccurate inventory data undermines MRP (Material Requirements Planning) processes, resulting in erroneous purchase orders, duplicated inventory, and missed procurement cycles. A staggering 35% of supply chain leaders admit their inventory data isn’t reliable enough to support planning—highlighting the urgent need for advanced inventory optimisation techniques. Source: Gartner.

The 3 Primary Causes of Poor Inventory Management

Below, we explore the three most common root causes that lead to poor inventory outcomes, and the advanced inventory optimisation techniques used to correct them.

1. Driving down inventory levels indiscriminately

The belief that less inventory always equals greater efficiency often results in fragile operations and unmet service commitments. When stock is stripped below critical thresholds, the ability to absorb disruption evaporates.

Why Do Supply Chains Run Too Lean?

Financial Pressures and Overzealous Cost-Cutting
Inventory is frequently the first casualty. Executives under pressure to release working capital may impose sweeping reductions without first re-evaluating their operating model, supply volatility, or customer segmentation.

Limited Visibility Across the Supply Chain
A lack of integrated visibility into supplier performance, lead time variability, or true customer demand signals undermines the ability to hold inventory at optimal levels. Without accurate, real-time data, it becomes nearly impossible to execute effective inventory optimisation in supply chains.

What Can Be Done?

Implement Segmented Inventory Strategies
Effective inventory optimisation techniques begin with segmentation. Segmenting inventory by demand variability, product criticality, value contribution, and service promise allows supply chains to allocate inventory with precision.

Align Inventory Strategy with Financial and Service Objectives
Inventory optimisation is not an isolated activity—it must be synchronised with working capital targets, supply chain resilience goals, and customer service metrics. Best-in-class organisations model inventory levels that support both a healthy cash position and a resilient service promise.

2. Insufficient focus on right place, right time

Few operational failures are as silently destructive—or as frequently underestimated—as inventory misalignment. When stock is positioned in the wrong location, the ramifications echo throughout the supply chain: increased transportation costs, sluggish lead times, service level failures, and, ultimately, lost revenue.

Why Inventory Ends Up in the Wrong Place

Lack of End-to-End Visibility and Planning Integration

In many organisations, inventory flows are planned and monitored in siloes, with little integration between procurement, warehousing, transportation, and sales forecasting. This fragmentation creates blind spots, making it difficult to detect imbalances, anticipate bottlenecks, or proactively reposition stock. When real-time visibility is lacking, misaligned planning decisions can cause inventory to be dispatched to the wrong locations, held in excess where it’s not needed, or delayed in reaching high-demand zones — often without being noticed until it impacts service levels or working capital.

Human Error in Transactional Processes
Manual data entry remains one of the most persistent sources of inventory error. Inaccurate recording during goods receipt, stock transfers, or order fulfilment creates discrepancies that accumulate over time. Miscounts during cycle checks or errors in updating records after movement events can easily result in inventory being recorded in one location but physically present elsewhere.

Supplier Inaccuracies at the Receiving Dock
Errors introduced upstream, such as incorrect quantities, mislabelled SKUs, or damaged goods from suppliers, further compromise accuracy. When these discrepancies go unnoticed at the receiving stage, they become embedded in the system, corrupting downstream planning and forecasting efforts.

Strategies for Accurate Inventory

Automate Inventory Tracking with Real-Time Systems
Automation remains one of the most effective safeguards against manual error. Modern inventory management systems equipped with barcode scanning, RFID tracking, and real-time system integration dramatically reduce recording discrepancies.

Implement Structured Receiving Protocols
A disciplined receiving process is non-negotiable. Every inbound delivery should be verified against purchase orders for accuracy in quantity, SKU, and quality before being booked into inventory. This is a critical step in maintaining inventory accuracy and avoiding the misallocation of stock across nodes or regions.

3. Managing Reactively

Poor inventory performance rarely results from an absence of technology or analytical tools. In most cases, it stems from a deeper structural flaw: the absence of proactive intent.

The Root Causes of Reactive Inventory Management

Lack of an Enterprise-Wide Inventory Strategy

One of the most persistent barriers to inventory optimisation is the absence of a clearly articulated, enterprise-level mandate. Without a unified view, definitions of success become blurred. Inventory targets remain ambiguous. Trade-offs—between working capital, service levels, and cost—are rarely formalised. Instead, decisions become decentralised and inconsistent, with local planners applying heuristics based on past experience rather than coherent policy.

The result? Inventory optimisation in supply chains becomes fragmented. One site holds surplus buffer stock “just in case,” while another teeters on the edge of stockout risk. Without a consistent inventory segmentation framework or standardised safety stock policies, systemic misalignment becomes inevitable.

Shifting from Reactive to Proactive Inventory Management

1. Establish an Inventory Mandate with Governance at the Core

Proactive inventory management begins with intent. Senior leadership must define inventory’s role within the business model. This means setting explicit policy on how inventory supports financial objectives, stabilises operations, and sustains customer experience. Ownership must be clearly assigned—across planning, finance, supply, and sales—with shared accountability for outcomes.

2. Use Integrated Planning to Enable Real-Time Responsiveness

Technology alone cannot fix broken inventory strategies—but it can unlock a step-change in agility when embedded within the right framework. Integrated planning platforms that synthesise real-time data across demand signals, supplier lead times, inventory positions, and capacity constraints equip organisations to act preemptively rather than reactively.

Inventory Optimisation Myth 1: Spreadsheet-Based Inventory Planning Is “Good Enough”

The Causes

Spreadsheets have long been the default tool for inventory planning: adaptable, cost-free, and deeply familiar. But what once felt empowering now creates hidden constraints. Sticking with spreadsheets might feel safer. But it’s costing far more than you think.

1. Familiarity Feels Like Control
   For many supply chain planners, Excel is second nature. When disruptions strike, forecasts shift, or urgent reallocations are needed, spreadsheet-based models buckle under the pressure. Inventory decisions become slow, fragmented, and blind to real-time dynamics.
2. Investment in Planning Capability Gets Deferred
   Inventory optimisation in supply chains is often undervalued in capital allocation decisions. Leadership teams delay investment in modern planning platforms, citing competing priorities or budget limitations. The result is a reliance on tools that were never designed to handle today’s supply chain complexity.

The Costs

1. Lagging Decisions and Missed Demand Signals
   Static spreadsheets lack real-time updates, making it nearly impossible to respond at speed. By the time planners detect an imbalance, the damage is already done—stockouts have occurred, or surplus inventory has locked up working capital.
2. Stock Misplacement and Inefficient Allocation
   Without advanced inventory optimisation techniques like predictive modelling or demand segmentation, stock ends up in the wrong places. Some locations overflow while others face chronic shortages, creating spiralling logistics costs and service-level failures.
3. Cumulative Margin Erosion
   What appears to be a cost-saving approach quietly drains value. Businesses absorb:

• Sales losses from preventable stockouts
• Rising expedite costs and premium freight
• Write-offs from obsolete or expired inventory
• Time consumed by error correction and spreadsheet reconciliation

The Reality

Spreadsheets were built for analysis, not agility. They cannot:

• Integrate real-time data across functions
• Model multi-echelon inventory flows or simulate volatility
• Run dynamic “what-if” scenarios tied to service level targets
• Connect inventory decisions to true cost-to-serve or differentiated customer value

The Resolution

Here’s what high-performing organisations do differently:

Use Integrated Planning Platforms: Move beyond disconnected spreadsheets. Adopt systems that unify demand forecasting, service-level targets, replenishment policies, and supplier inputs in one environment—creating a single source of truth for inventory optimisation.

Focus on Capability, Not Just Tools: Planning tools alone aren’t enough. Equip teams to run simulations, interpret outcomes, and challenge assumptions. Inventory optimisation in supply chains depends on critical thinking as much as technology.

Myth 2: Inventory Optimisation Means Simply Holding Less Stock

There’s a persistent misconception in many boardrooms: that inventory optimisation is code for “just reduce stock levels”. On a spreadsheet, the maths appears sound—fewer goods held, less capital tied up. But this one-dimensional view creates deep, systemic issues in today’s complex supply networks.

The Causes

1. Pressure to Cut Costs at Speed: Inventory remains one of the most visible and controllable line items in working capital. During times of financial constraint, executives often look to inventory as a lever for immediate cost savings. But those reductions, when disconnected from supply chain planning and customer segmentation, often create downstream disruption far outweighing the original savings.
2. Misaligned Metrics Across Functions: Procurement chases economies of scale. Sales pushes for product availability. Finance focuses on releasing cash. With siloed KPIs, inventory becomes a battleground of competing priorities. The end result? Stockholding policies that shrink availability in high-impact areas while inflating it in low-priority zones.

The Consequences

1. Service Levels Begin to Slip: Inventory reduction without recalibrating demand forecasting, replenishment cycles or fulfilment models results in fragile service. Stockouts rise, fulfilment lags, and fill rates fall—particularly across high-variability or low-velocity SKUs. Strategic customer relationships suffer first.
2. Crisis Becomes the Default Operating Mode: When inventory drops below buffer thresholds, the response is reactive. Freight costs surge as orders are expedited. Emergency production runs, premium sourcing and last-minute allocations become the norm. Inventory planning shifts from a strategic function to damage control.

The Costs

Chasing lower inventory levels without a rigorous optimisation framework carries tangible and intangible penalties:

• Lost revenue from missed sales due to out-of-stock positions
• Soaring logistics costs as organisations rely on premium freight or emergency replenishments
• Production halts triggered by parts unavailability or batch misalignment
• Volatile workflows driven by last-minute planning and schedule instability
• Erosion of trust as customers experience inconsistency and unreliability

The Solution

Inventory optimisation in supply chains is about holding the right stock, in the right locations, at the right levels—aligned to service expectations, demand volatility, and cost-to-serve insights.

High-performing organisations deploy advanced inventory optimisation techniques to:

• Build segmentation models based on customer value and SKU volatility
• Set differentiated service targets based on product mix and channel dynamics
• Align inventory decisions with end-to-end planning, not isolated metrics
• Maintain agility under disruption without over-reliance on reactive measures

Myth 3: Lean Means Eliminating Buffer Stock

One of the most dangerous misinterpretations in modern supply chain strategy is the notion that Lean requires the removal of all buffer or safety stock. It’s an oversimplification that undermines operational resilience—and in volatile global supply environments, it’s a risk most supply chains simply cannot afford to take.

The Causes

1. Oversimplification of Lean Fundamentals
   Lean is often reduced to a singular mantra: remove all excess. But this strips the methodology of its core intent. Lean targets waste, not strategically necessary stock. In fact, when properly applied, Lean includes buffer stock as a mechanism for flow continuity. When buffers absorb variability, enable responsiveness, and protect service levels, they are not waste—they are operational enablers.
2. Strategy Misaligned from Execution
   Supply chain teams under pressure to “go Lean” often default to arbitrary stock reductions, disconnected from actual demand variability, lead time fluctuation, or service expectations. The outcome is a superficially Lean system that is operationally unstable—reactive, brittle, and vulnerable to disruption.

The Consequences

Degraded Service Reliability: When buffer stocks are stripped away indiscriminately, systems lose their ability to absorb shocks. A minor supplier delay or demand spike can trigger stockouts, late shipments, or order cancellations—harming key account relationships and undermining trust.

The Costs

Removing safety stock without applying inventory optimisation techniques leads to hidden costs that rarely surface in immediate P&L reviews—but manifest rapidly across the value chain:

• Escalating logistics costs due to emergency shipments
• Revenue leakage from missed fulfilment or stockouts
• Increased labour cost driven by reactive rescheduling and rework
• Customer churn due to inconsistent service performance

What’s saved in inventory carrying costs is often eclipsed by margin erosion, reputational damage, and operational inefficiency.

The Reality

Lean thinking isn’t about reducing inventory to zero—it’s about eliminating non-value activities while safeguarding flow and responsiveness. In mature, resilient supply chains, Lean and inventory optimisation co-exist:

• Buffers are deployed intentionally, not reactively
• Inventory is aligned to demand patterns, lead time variability, and service tiers
• Stockholding is calibrated using data-led segmentation, not heuristics

The Solution

To shift from rigid minimalism to strategic inventory optimisation, organisations must adopt nuanced, data-driven practices that balance cost, risk, and service.

1. Understand Variability, Then Design for It: Use demand history, volatility profiles, and segmentation models to pinpoint where uncertainty resides. Strategic buffer placement should follow—not precede—this analysis.
2. Segment Safety Stock by SKU Profile and Customer Criticality: Develop tailored buffer policies that reflect product behaviour, customer value, and fulfilment risk. Not all SKUs require the same coverage. Inventory optimisation techniques help identify where it matters most.
3. Simulate Trade-offs with Scenario Planning: Modelling supply and demand scenarios allows planners to test service-level impacts before committing to stock changes. Optimisation is about balance, not absolute reduction.

Tim Richardson
Development Director
Iter Consulting