Inventory positioning describes how a business strategically manages the location of its inventory, both within the supply chain and where it’s held physically, such as a warehouse in Denver or Philadelphia. Inventory positioning is a critical consideration as a business juggles the constraints and expenses of supply chain choices with the needs of its customers. Proper planning can reduce a business’s costs while improving the speed and quality of service.
What Is Inventory Positioning?
Inventory positioning is the practice of strategically situating inventory, both geographically and within a supply chain, to improve economic efficiency and best serve customers’ needs. In simple terms, it answers the question, “Where should I store my inventory?” Many factors can influence inventory positioning, including unit economics, demand forecasts and customer expectations. Different business models may necessitate different approaches, but almost every business that deals in physical goods can take advantage of inventory positioning to streamline operations, especially during periods of growth.
- Inventory positioning determines where inventory is held prior to sale, along different steps in the supply chain and in different places geographically.
- Inventory positioning can reduce a business’s costs and improve its ability to meet customer demand.
- There’s no single formula for inventory positioning, but mapping best practices to the needs of a business, its customers and the type of supply chain it uses will go a long way toward successful inventory management.
Inventory Positioning Explained
Competitive advantage comes in many forms, including a business’s ability to have the right products ready for its customers where and when they need them. This is why inventory positioning, as part of a greater logistics strategy, is critical. NC State University’s Supply Chain Resource Cooperative defines inventory positioning as “the selective location of various items in the product line in plant, regional or field warehouses”. The Journal of Commerce says inventory positioning “involves accurate product allocation across shelves and channels, improved velocity, safety stock evaluation and reduction of supply and demand variability”.
That may sound complex, but inventory positioning is really two simpler topics often conflated into one:
Where is inventory in the supply chain?
From baskets of parts in factories to warehouses and order fulfillment centers to retail shelves, how much “stuff” is in its various stages of being ready for customers to take ownership? A business will want to be ready to meet customer demand, while also taking advantage of opportunities to save time and money, by making it possible for inventory to flow through the supply chain as efficiently as possible.
Where is inventory geographically?
Next come the realities of storage and transportation logistics. Having 10 units of the latest tablet in 100 stores won’t help if 1,000 customers show up at a single location and shipping takes time — which, depending on customers’ needs and what the competition is offering, may or may not be on the business’s side.
In both cases, the business’s goal would be to match its inventory’s position to customer demand — but without having excess inventory that’s costly to produce, transport and store. While there’s no magic formula to accomplish that, some general principles and best practices that apply to different industries, products and consumers can be helpful.
The Purpose of Inventory
Not every business needs to have products on site and ready to sell — e.g., there’s no store where someone can browse for aircraft carriers — but there are many advantages for those that do. Understanding them beyond “Well, you need inventory in stores to sell anything” can lead to more efficient inventory management.
Broadly speaking, the purpose of inventory falls into one of three categories: unit economics, customer satisfaction and risk management, each of which can be further drilled down.
Costs (and, therefore, margins) can often be improved by building up a little extra inventory to maximize the benefits a business gets for the necessary expenditures. Consider:
- Economies of scale (production): It would be expensive and time-consuming to manage a process in which products were created one unit or one order at a time. Larger production runs — informed by solid demand planning — can lead to products being produced faster and at lower costs.
- Logistics costs: Getting materials and products from one place to another can be costly and time-consuming. If, for example, a business is going to spend thousands of dollars to get a container on a ship from China to New York and wait 30 days for its arrival, it’s going to want to fill up that container to reduce the average cost of transporting each item. This may mean having more inventory in stock or in the pipeline than would otherwise be optimal, but the costs of storing a little extra product are likely minuscule compared with the costs of moving extra shipping containers.
- Volume discounts: A business’s suppliers are also likely to be faced with some unit economics that scale favorably, so, by placing larger orders, the business can get better prices and better unit economics for its own sales.
Good inventory management plays a direct role in improving customer experiences and satisfaction. Among the ways to achieve this:
- Avoid stockouts/delays: If a business doesn’t keep inventory on hand or produces or purchases only enough for just-enough/just-in-time delivery, it may find itself scrambling when faced with unexpected demand. The business could easily run out of stock or production capacity in the short run, while at the same time disappoint customers who perhaps seek what they need from a competitor. Having extra inventory on hand, also known as safety stock, can help a business handle spikes in demand. (More on safety stock soon.)
- Improve customer service: Having inventory in stock can help salespeople better meet customers’ needs. For example, a customer may think they want one product but, after a conversation or online chat with a salesperson, realize another offering would be a better choice. The best scenario would be for that product to be in stock. The same applies to a customer who is returning a defective product. The business’s ability to replace a faulty unit immediately can potentially turn the customer experience into a positive one.
- Rethink marketing: Having inventory on hand for customers to browse can create a retail experience that drives sales. Some companies, like Tesla and Warby Parker — once online-only sellers — are seeing meaningful value in this idea. They now have sample inventory that they don’t necessarily plan to sell in physical “showrooms” (not stores); the entire point is for customers to browse in person and order online.
Keeping a little extra inventory on hand can help a business ride out disruptions that would otherwise be very costly. Some examples:
- Supply chain disruptions: Having extra inventory on hand allows a business to continue selling through delays and disruptions in its upstream supply chain. Whether caused by a delayed cargo ship — pro tip: don’t block the Suez Canal — a shortage of a key input or, ahem, a pandemic, it’s critical to maintain business as usual while such issues are sorted out. In the more everyday case, a business should be able to handle typical variations in supply chain speed and efficiency.
- Price spikes: Running an operation where items absolutely have to be bought at market price at certain times or else run out may risk profitability as well as lose customers to competitors. Events like fires and panics can also send prices of raw materials temporarily soaring. The business’s ability to strategically build up more inventory when prices are lower, or delay a purchase and use existing inventory already built up, may be the difference between a great or tough financial year.
- Redundancy in the face of unexpected losses: Bad things happen to good companies, and there usually isn’t much a business can do about it except to be prepared for the unexpected. A warehouse may catch on fire, for example, or a hurricane may knock a fulfillment center offline. Having extra inventory on hand allows the business to continue serving its customers while it recovers from the loss of stock or production capacity.
Types of Inventory
It’s easy to think of items sold under the single heading of “inventory,” but a little more strategizing and classification can lend itself to more efficient product management. Inventory can be broken down into four types, as follows:
- Buffer: Buffer inventory, also called safety inventory or safety stock, is a business’s “just-in-case” inventory. It prepares a company for unexpected surges in demand or unexpected delays in replenishment. Buffer inventory can also compensate for inaccurate demand forecasts.
- Cycle: Cycle inventory, also called cycle stock or working inventory, is the amount of inventory a business has available to meet regular demand during a period of time. Cycle inventory ensures that the business’s daily operations and its cash flow keep apace. With a combination of experience, forecasting and analytics, the business can anticipate how much it needs to have on hand and when it’s time to reorder.
- Anticipation: Anticipation inventory is similar to buffer inventory in that items are on hand for sudden increases in demand, but usually anticipation inventory is built up with a specific change in mind. It may be that the business foresees a spike in demand but has no good way to estimate the size. For example, foot traffic in front of a store is likely to increase due to a celebrity appearance, but how much business generated as a result is hard to predict. Similarly, a company that knows it’s about to get good publicity, such as the result of a favorable product review or for a charitable act — will often build up anticipation inventory, especially smaller companies where the spike in interest could represent a large bump in weekly sales.
- Pipeline: Pipeline inventory are products in transit between locations. Generally speaking, anything en route to a store or in a new delivery waiting to be sorted, processed and stocked is considered pipeline inventory.
Identifying the Appropriate Supply Chain Strategy for Your Business
The main factor that determines a business’s inventory positioning strategy is the type of supply chain it relies on. There’s a big difference between selling Christmas trees — where an entire stock must be planned well in advance for customers who are likely to purchase and bring their trees home on the same day — and selling commercial jets to airlines — where orders are sometimes placed years in advance of production.
From an inventory positioning perspective, there are three main types of supply chain: push, pull and hybrid (push-pull).
- Push supply chains: In push supply chain management, companies forecast demand and create or purchase inventory to be sold in advance of any actual order or sale. Customers in this scenario typically expect to receive their purchases within short time frames — far shorter than the time it takes to make and deliver the items. Most consumer packaged goods on retail shelves are part of a push supply chain.
- Pull supply chains: In a pull supply chain, production is driven by customer demand and orders. Distribution is often directly to the client, eliminating the need for retail stores, and the time it takes to create a product is equal to or less than the time between order placement and delivery. A pull supply chain works well for products that are expensive — where having inventory on hand would substantially drive up business costs — and/or customized. Commercial aircraft manufacturing is a good example: Jets can cost tens of millions of dollars and, from seat and cargo configurations to the paint job, they are usually customized for a specific airline.
- Push-pull supply chains: A push-pull supply chain is driven partly by forecasting and partly by orders. In this hybrid supply chain, companies must be ready for customer demand, but those customers won’t necessarily need their items right away. For example, an automaker can’t supply every dealer with one of every car in every color with every feature configuration, but it does need to make cars available for test drives and some on-site purchases. A push-pull supply chain may also be driven by the need for customization. For instance, think about a customer ordering a computer where they pick which processor, hard drive and monitor to be used. They’re willing to wait a little while to get exactly what they want, but the computer company still needs to have all of those parts on hand, ready to be assembled.
How to Execute Inventory Positioning
A business must match its own economics with customers’ needs and expectations in order to implement the right inventory positioning strategy. This is typically driven by the use of a push, pull or push-pull supply chain, described above.
For example, the success of inventory positioning in a push supply chain will depend, in part, on how well a business can forecast demand. It will need to hold inventory in close proximity to customers, on shelves where they can purchase the items and in nearby storage facilities (back rooms and distribution centers) for quick replenishment. Geographic diversification can also be important to reduce the chance of stockouts while retail locations await resupply.
A pull supply chain is more about managing customer and supplier relationships. A business will want to keep enough materials and other production inputs on hand, but it isn’t typically going to have much in the way of finished goods at its fingertips. Geographic diversity in production and storage is less valuable, especially if the company can achieve economies of scale through consolidation. Boeing, for example, has one big factory in Washington state, and its products almost literally deliver themselves.
A hybrid, push-pull supply chain takes best practices from both push and pull chains to streamline operations. Demand forecasting and geographic positioning can be important, but, depending on the product, a business may also need to invest in responsive customization, after which its supply chain will look more like a “pull”.
Once the business has figured out its optimal strategy for positioning inventory within the steps of its supply chain, it will need to decide where, geographically, to keep its inventory. How many factories and warehouses are needed, where they should be located and the transportation routes likely to be required are all part of inventory positioning. Indeed, integrating geography with demand forecasting and current logistics is an everyday task for supply chain managers.
Take the example of an omnichannel retail company with two distribution centers, one in Philadelphia and one in Denver. This company has a big order to fill in Chicago, which is about 902 miles from Denver but only 663 miles from Philadelphia:
If this company decided on a simple strategy of minimizing travel distances, it would ship from Philadelphia and save almost 250 miles of travel on this order. But “on this order” is key.
What if this company’s biggest customers are concentrated in New York and Washington, D.C.? Choosing the closer Philadelphia distribution center for the Chicago delivery could leave that facility without its buffer inventory if demand forecasts suggest a need to ship to New York and Washington, D.C., soon. As a result, those subsequent East Coast orders might have to come from Denver. The total distance traveled by the three delivery aircraft would be 3,753 miles:
Now, if inventory positioning is handled more holistically and strategically by incorporating demand forecasts and protecting buffer inventory, the company may decide to fill the Chicago order from Denver and the other two from nearby Philadelphia, like so:
These three flights have a combined travel distance of 1,111 miles — less than a third of the previous strategy. The inventory positioning expert who placed a facility in Philadelphia knew what she was doing, but that decision only pays off if inventory positioning is an everyday concern and not considered only when setting up new facilities and supply chains.
Manage Inventory Positioning With Software
At this point, you might be thinking, “That’s cool, but it’s crazy to manage inventory positioning outside of a stylized example and apply it to the large and never-ending flood of data that is my company’s operations. How am I supposed to implement this?” The answer is: with software. You can’t properly track, much less optimize, inventory positioning in a large organization without some kind of software solution in place. Ideally, you’ll have a system that scales with your business and can offer real-time demand planning functionality that includes and goes beyond inventory positioning. NetSuite Inventory Management software does exactly that, while also offering tracking and analytics capabilities to enhance your efforts to understand, streamline and integrate your operations.
Inventory positioning is a valuable practice for many businesses that sell physical products. It provides a perspective that guides them through big decisions about how to set up their supply chains, and small decisions about how, when and where to move a truck’s or plane’s worth of inventory on any given day. Good inventory positioning can reduce costs while improving the customer experience — a rare win-win in a world of trade-offs.
Inventory Positioning FAQs
What is an inventory level?
A company’s inventory level is defined as what it has on hand that is physically available to be sold minus the inventory that has already been sold but is still in the company’s possession.
How do you find inventory position?
To find inventory position, a business adds its inventory level to the inventory it has on order from suppliers or manufacturing.
Why is inventory positioning important for firms?
Inventory positioning is what allows firms to have what customers need, when they need it and where they need it. By strategically managing how inventory flows through the supply chain and is held in physical spaces, companies can respond to demand and improve the efficiency of their business, lowering costs while delivering more value to customers.
What is supply chain positioning?
Supply chain positioning is basically the same as inventory positioning, but the term is used more when dealing with earlier stages in the supply chain, where the items and materials in question aren’t thought of as “inventory” just yet. If you see the acronyms SCPS (supply chain positioning strategy) or PPS (production positioning strategy), it’s probably referring to similar issues but with a focus on manufacturing and production, rather than stocking and selling to end consumers.