Should companies have large amounts of inventory on hand for customers, or should companies keep inventory at a minimum to free up cash for other parts of the business?
Your uncle, Tim, started a very successful “home improvement” business 10 years ago. He wanted to create a place where people could go to get anything they needed to complete their “do-it yourself” home building projects. Coupled with excellent service, Tim believes that he can gain and retain customers by having a large assortment of inventory from which to choose. In addition, he can obtain significant purchase discounts by buying the inventory in large bulk. You argue that maintaining amounts of inventory requires significant commitments to fixed warehousing and other costs that could be avoided by setting up an e-commerce Web site and taking customer orders that are then acquired and delivered one customer at a time. Although this approach will increase the overall variable costs as a result of not receiving bulk discounts on the smaller individual orders, you are able to demonstrate with C-V-P analysis that there is less risk in your approach to selling home improvement products. Your uncle strongly argues that, “Having the inventory on hand for your customers is the key to success. If I don’t have what they are looking for, they will just go down the street to Home Depot! I have got to have inventory in the stores. There is no other way!” What should Tim do?