Welcome back to my 5-part series on supply chain levers! In Part 1, I examined how Toyota leverages capacity management to transform constraints into competitive advantages. Today, we dive into perhaps the most visible—and expensive—lever in your supply chain toolkit: inventory.

Walk into any warehouse, and you'll see millions of dollars sitting on shelves. That inventory represents a delicate balancing act between having enough stock to meet customer demand and avoiding the cash flow nightmare of holding too much. Get it wrong, and you're either turning customers away or watching your working capital disappear into boxes that gather dust.

What Is Inventory in Supply Chain Management?

"Inventory is a stock of materials used to satisfy customer demand or to support the production of services or goods" (Krajewski, Malhotra, Ritzman, 2016, p.339). Inventory management involves strategically planning and regulating stock levels to align with a company's operational and competitive goals.

While businesses aim to avoid excessive inventory (to cut costs) or insufficient stock (to meet demand), the core focus is optimising inventory quantity to efficiently support the organisation's strategic objectives. Effective inventory control ensures a supply chain operates at its full potential, balancing cost-efficiency with the ability to fulfil customer needs (Krajewski, Malhotra, Ritzman, 2016).

The Hidden Cost of Holding Stock

Inventories play a vital role in organisations, their workforce, and supply chains by directly influencing daily operations. They must be tracked, financed, utilised in production, and strategically managed to meet customer demands.

While investing in inventory ties up financial resources, much like purchasing equipment, it limits an organisation's ability to allocate funds elsewhere, impacting cash flow. Despite this cost, businesses prioritise inventory management because product availability is a crucial competitive advantage, often serving as a key driver of customer satisfaction and market success (Krajewski, Malhotra, Ritzman, 2016).

Vendor-Managed Inventory (VMI): Shifting the Burden

VMI is a collaborative supply chain approach where the supplier takes direct responsibility for maintaining the buyer's stock levels within agreed-upon minimum and maximum limits. This grants the supplier significant autonomy in managing replenishments to ensure product availability (van den Bogaert and Jaarsveld, 2022).

Under VMI, the supplier takes responsibility for maintaining optimal stock levels of its products within the buyer's warehouse. A standard extension of VMI is Consignment Inventory (CI), where the supplier retains ownership of the goods until the buyer withdraws them for use or sale (van den Bogaert and Jaarsveld, 2022).

Walmart's VMI Masterclass

Walmart's VMI system shifts a portion of inventory management costs to its suppliers, lowering the company's operational expenses. By strategically combining finished goods, transit, buffer and anticipation inventory types, Walmart reinforces its cost leadership strategy, minimising expenses while ensuring product availability (Greenspan, 2024).

Here's the key insight:

Collaborative Planning, Forecasting and Replenishment (CPFR)

CPFR is a partnership-based approach that helps manage the buyer/supplier relationship across the supply chain. CPFR is a development of VMI, grounded in establishing a shared framework between supply chain partners.

This framework defines clear protocols for exchanging data (e.g., sales trends, inventory levels) and outlines how replenishment decisions will be jointly made. A cornerstone of CPFR is the development of a unified demand forecast, which is collaboratively created and formally approved by both the supplier and the retailer (Christopher, 2011).

The Walmart-P&G Partnership: A $3 Billion Success Story

Walmart's CPFR program is exemplified by its collaboration with Procter & Gamble (P&G). Their integrated computer systems connect P&G to Walmart's retail outlets and warehouses, streamlining inventory control.

The system automatically detects when specific P&G items need restocking at Walmart, sends an electronic notification to P&G, and initiates a replenishment order. Products are then shipped from the closest P&G location to the relevant Walmart distribution centre (DC) or store (Nguyen, 2017).

The results speak for themselves:

Key Takeaways for Your Operations

1. Information Beats Inventory: Real-time data sharing reduces the need for safety stock

2. Collaborative Relationships Win: Partner with suppliers/customers for mutual benefit

3. Automate Replenishment: Systems can respond faster than humans to demand signals

4. Shared Forecasting: Two heads are better than one when predicting demand

5. Strategic Cost Shifting: VMI can move inventory costs to those best equipped to handle them

Coming Next: Part 3 explores how companies like Zara use time as their ultimate competitive weapon, compressing cycles that take competitors months into just weeks.