Most business leaders don’t fully understand the impacts of supply chain disruptions, despite the craziness brought on by the recent tariffs and the global pandemic before that. This is because global supply chains (as well as domestic supply chains) at their core aren’t designed to be flexible as much as they are designed to be efficient. Over the past 50 years, American supply chain leaders and managers have generally been tasked with the primary focus of taking costs out of the system. Their performance is usually measured by how well they reduce costs and improve efficiency, and they are hired and compensated according to how well they accomplish these core goals. Consequently both US and global supply chains today run extremely tight, which leaves them minimal ability to flex and adapt to volatility, though volatility continues to grow. This is obviously a problem, and part of the problem is that too few leaders even recognize that it is a problem, if you’ll forgive the redundancy.

As shown in ORI’s recent survey of business and supply chain leaders, by far the greatest portion of respondents said that they viewed cost optimization as the most important issue preventing them from meeting their KPIs (41%), while only 14% were focused on supply chain flexibility and risk management. If all you have is a big “cut costs and improve efficiency” hammer, every supply chain problem looks like a nail.

Let’s look at some reasons why flexibility should be a primary target for those involved in developing and operating today’s domestic and global supply chains.

Supply chain flexibility must be prioritized over raw process efficiency (or even cost)

Today, a supply chain capable of reacting and adjusting quickly to uncertainty and disruptions, supported by flexible strategizing and scenario development, is far more valuable than a low bottom-line cost number or a rigid, but efficient plan. Supply chain managers, planners, and leaders must not only work toward accurately forecasting and running scenarios for disruptions, unplanned future events, and trends, but must also immediately react and readjust those plans and forecasts when new data becomes available or when external events create volatility.

When needed, sacrificing a reasonable amount of up-front or operational cost efficiency to attain a supply chain capable of remaining functional and profitable amid chaos is absolutely worth it, since this results in a more resilient, profitable organization overall. Rather than doubling down on the “reduce costs!” approach in the face of challenging market conditions and disruptions, it would usually be better for a company to take the more intelligent course of focusing more attention and resources toward achieving accuracy, speed, and flexibility in the data and analytics that allow real-time, meaningful decision-making. This, in turn, enables the natural consequences of improvements in cost-reduction and efficiency (which are certainly valuable goals), but with an informed, truly proactive, more profitable, and more resilient process as a result.

Why blindly adding more inventory can cause unforeseen problems

When uncertainty exists, companies typically pull the “more inventory” lever more often than they reconsider their operating strategy and optimize it for adaptability and flexibility. When companies don’t know what issues tomorrow may bring, their natural inclination is to just invest in more inventory to create a buffer against volatility in demand.

Many businesses whose supply chains rely on international trade were hugely impacted over the past couple of years due to the seemingly day-to-day shifts in tariff rates, capricious duties, and enormous supply interruptions. In this uncertain environment, organizational leadership may insist on increasing inventory/warehousing. However, an uninformed “more inventory” approach can itself result in significant disruptions and additional costs/losses, particularly in the case of Food & Beverage businesses that must deal with product expiration dates and/or spoilage as well as the normal human and operational resources required for building and maintaining a greater inventory.

Unfortunately, without informed planning strategies and intelligent tools, and when decisions aren’t based on scenario-based demand, lead times, capacity, and risk data, blindly increasing inventory can create more issues than it solves. The key term here is blindly. Of course it’s a good idea to maintain a data-supported cushion of inventory or emergency stockpile where possible and appropriate. This is even more important during volatile market conditions, unexpected supply chain disruptions, social upheaval, and/or economic uncertainty. Based on the hugely volatile market space in recent years, many companies are opting to transition a bit further away from just in time (JIT) manufacturing or inventory management to a more scenario-based approach (including increasing inventory as appropriate and as backed by data) to help create a greater cushion against supply chain disruptions.

However, a knee-jerk, uninformed reaction to increase inventory in the face of perceived (or real) volatility can create its own disruptions because:

• It ties up warehouse capacity. Excess inventory consumes storage space, leaving less room for products that are actually needed. This can cause congestion, extra handling costs, and slower picking and shipping.
• It creates the bullwhip effect. Explained briefly, if companies interpret temporary uncertainty as a reason to order substantially more, their suppliers may see an artificial surge in demand. They in turn may increase production and orders for their own inputs, potentially amplifying the original problem (real or imagined) and create potentially significant stockouts and cost fluctuations throughout the supply chain and adjacent businesses.
• It can create shortages elsewhere. A buyer stockpiling a scarce component may temporarily protect itself while making that component less available to other buyers. If multiple firms do this simultaneously, the resulting competition can worsen the shortage.
• Inventory can become obsolete. As noted above, products with short life cycles, expiration dates, or changing specifications may lose value while sitting in storage. The company then has both excess inventory they can’t sell and insufficient inventory of what customers actually want.
• Cash gets trapped. Purchasing inventory requires working capital. If too much money is tied up in slow-moving stock, the company may have less liquidity available for transportation, suppliers, maintenance, technology, or other genuinely urgent purchases.
• Forecast errors become more expensive. Stockpiling based on an uninformed assumption essentially bets that future demand will justify today’s purchases. If the assumption is wrong, the organization has to discount, liquidate, return, or dispose of the excess, creating significant losses.
• More inventory means more handling and complexity. Every additional pallet or SKU has to be received, counted, stored, tracked, moved, inspected, and eventually shipped. Poor visibility can lead to misplaced inventory, inaccurate records, and operational bottlenecks, worsening cost risks.
• It can hide the real problem. Large safety stocks can mask unreliable suppliers, inaccurate forecasts, long lead times, or poor production planning. Management may feel protected while the underlying process remains fragile. Always seek to apply root cause analysis and identify the actual problem before engaging in a solution strategy.

Rather than simply increasing inventory as a hopeful catch-all during volatility, what leaders need instead is the ability to take advantage of their data to simulate scenarios, run more analytics, and make more strategic, informed decisions. This is very difficult with many current tools and particularly for those businesses still relying on legacy systems and spreadsheets.

Rather than investing in a blanket increase in inventory without reconsidering its operational validity, a better approach is to utilize AI-informed scenario/simulation generation, seek more informed analytics, run S&OP continuously, enable data integration, and tie that data to strategy to make more profitable, flexible strategic decisions.