A supplier of raw materials creates a stock of raw materials. Some of those raw materials go to a producer, who builds a stock of them. In addition, the same producer also stocks finished goods. Part of that stock goes to a wholesaler, who stocks it. And part of that leaves for a store, which also stocks it. And in corona times, consumers then stock up on toilet paper again. Isn't that an incredible waste of space? Does it really have to be? Yes.
Time pressure as a driver of inventories First, there is a time motive. Some time is lost between mining raw materials and delivering a finished product. Developing a commercial model in which the entire process is triggered when a store places an order does not work. A producer wants to be sure that he can always produce, a wholesaler wants to be sure that it can always deliver orders on time, and a store wants to be sure that the consumer does not have to wait, or does not have to wait long, for a product. And, of course, this will only work if everyone stocks up.
Consumers also stock up for this reason. For him it is not desirable to go and buy a small amount of spices every time he wants to cook. That would be a waste of time. With a pepper barrel, he avoids that.
However, attempts are often made to deal cleverly with time constraints. One example is dropshipping. This involves placing an order with the supplier only when the seller receives an order from a customer. The supplier then immediately ships the product to the customer, so it still gets there at lightning speed.
Eliminate uncertainty factorThe commercial world is full of uncertainties. For example, it is not known in advance how high customer demand will be. There are ways to predict market demand, but 100% certainty does not exist. There is also uncertainty about delivery times, machines may break down, quality problems may occur, a supplier's staff may go on strike and so on.
Among consumers, the uncertainty factor also sometimes plays a role. During the corona pandemic, for example, that uncertainty caused consumers to stockpile toilet paper or dry food.
Again, attempts are often made to mitigate uncertainty factors. Among other things, contractual penalties can be imposed on suppliers who fail to deliver on time. This reduces risks and a more limited inventory may suffice. This is important because inventories always involve inventory costs.
Economic factorsFinally, economic factors also play a role. For products whose price is seasonal, larger inventories are built up when the price is at a low point. Similarly, when price increases are expected, larger inventories may be chosen. In addition, there are always costs associated with orders, and ordering larger quantities is almost always more economical. This is when stockpiling can be a good choice. Finally, stockpiling is sometimes interesting from an investment perspective. For example, a company may stockpile gold because it expects gold prices to rise.
Again, consumers do just the same thing. For example, when there is a 2+1 free offer, they immediately buy three tubes of toothpaste, even though this will last them a while.
Stockpiling is very importantLet it be clear that there are several reasons why stockpiling is so interesting. Yet it is often not a black-and-white story. A larger order quantity can result in more advantageous ordering terms, but stockpiling also involves costs. And it's just not always expedient. For example, a consumer will not be too quick to buy three barbecues because he anticipates later breakdowns.