A supplier fails to deliver on time. A popular product runs out during peak season. A sudden increase in demand catches the business unprepared.Management responds by increasing safety stock.The decision makes sense. Additional inventory reduces the risk of lost sales, production interruptions and dissatisfied customers.But what happens when supply conditions improve and demand returns to normal?The inventory may remain.
An extra 30 days ties up almost $1m
01From Just in Time to Just in Case — and Eventually Just Because
Traditional inventory management emphasizes efficiency: holding enough stock to meet demand without unnecessarily tying up capital.
Periods of supply chain disruption have challenged that approach. Businesses increasingly hold additional inventory as protection against uncertainty.
That protection can be valuable.
However, an inventory policy introduced during exceptional circumstances can quietly become a permanent operating practice.
The original risk may have declined, but the purchasing quantities, reorder points and safety stock levels remain unchanged.
At that point, the business is no longer necessarily holding inventory because the risk justifies it.
It may simply be holding inventory because it has become accustomed to doing so.
02The Hidden Capital Commitment
Consider a distributor with annual cost of goods sold of $12 million.
Management increases inventory coverage from 45 to 75 days to protect against supply disruptions.
| Metric | Before | After |
|---|---|---|
| Annual COGS | $12.0M | $12.0M |
| Inventory days | 45 | 75 |
| Average inventory | $1.48M | $2.47M |
| Additional capital tied up | — | $0.99M |
Illustrative example. Average inventory is estimated using annual COGS ÷ 365 × inventory days.
The decision requires almost $1 million of additional working capital.
Assuming an annual financing cost of 10%, that represents approximately $99,000 in additional financing cost per year, before considering storage, insurance, handling and obsolescence.
That cost may be justified if the additional inventory prevents significant lost sales or production interruptions.
But what if the supply disruption has already ended?
The company may continue paying for protection it no longer needs.
03The Question Finance Should Challenge
A traditional financial review might highlight that inventory days have increased from 45 to 75.
That identifies the symptom, but not whether the decision was economically justified.
A stronger Finance Director asks:
- Which products genuinely require additional safety stock?
- What is the probability and financial impact of a stockout?
- How much additional inventory is needed to reduce that risk?
- Does the expected benefit exceed the financing, storage and obsolescence costs?
- Have the assumptions behind the inventory policy changed?
The objective is not to minimize inventory at any cost.
Aggressive inventory reductions can damage customer service, disrupt production and destroy sales opportunities.
The objective is to hold the right inventory for the right economic reason.
04From Inventory Reporting to Capital Allocation
Inventory should not be evaluated only through turnover ratios and ageing reports.
It should also be viewed as a capital allocation decision.
Every dollar committed to inventory is a dollar unavailable for another purpose: expanding the business, reducing debt, investing in technology or maintaining liquidity.
This changes the conversation between Finance, Sales, Procurement and Operations.
Instead of asking only how much inventory the business holds, management should ask what value that inventory creates or protects.
The real question is not whether inventory is high. It is whether the capital committed to inventory is still justified by the value it protects.
Research inspiration: PwC — Working Capital Study 25/26. The financial examples and management frameworks are original and hypothetical, not findings or company data from the study.
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