What is the “right” inventory management approach for a purchased item?

Abstract

Purpose How should a firm decide which of four choices – i.e. inventory speculation, inventory postponement, inventory consignment, and reverse inventory consignment – is most appropriate to adopt for a given purchased item in a particular context? This paper seeks to identify and explain the critical factors that drive this decision. Design/methodology/approach By conducting a review of relevant literature and deriving anecdotal observations from four case studies. Findings This decision is influenced by three factors – customer demand or usage requirements, nature of the supply line and bargaining power of a firm relative to the supplier. Research limitations/implications From the perspective of science, the conduct of both empirical research to augment the reported anecdotal evidence and conceptual research along a number of directions (e.g. to juxtapose the research findings in existing theories, to examine variations of the four “pure” inventory management approaches, or to consider the vantage point of the supplying firm rather than that of the buying firm) is encouraged. Practical implications As for the perspective of practice, the critical factors serve as the basis for the articulation of a decision framework – one that should help firms not only pin‐point the most relevant issues concerning a particular purchased item but also to avoid the costly mistake of selecting a less‐than‐ideal inventory management approach. Originality/value These critical factors, along with the proposed decision framework, extend prior research which has focused only on choosing between the inventory speculation approach and the inventory postponement approach.

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