Inventory is the largest capital allocation most companies never govern.

 

Every few months, I have the same conversation with planners at my customers. And every time, I leave with the same unsettling realization:

Vast amounts of corporate capital are being allocated by people who do not understand the system which governs those decisions.

This is not a criticism of planners. It is a far more serious indictment of how modern corporations govern inventory and I am astounded about how calm and relaxed the executives tolerate these immense losses.

In many companies, inventory is the single largest balance-sheet position after fixed assets. It directly determines cash flow, service levels, working capital, write-offs, and, ultimately, profitability. Yet the daily decisions that shape inventory are routinely delegated to planners who are neither trained in system dynamics nor accountable for capital efficiency. And so we must face the hidden truth that inventory is not managed by people, but by a system which we do neither understand nor control. That should alarm every CFO and COO.

Most executives believe inventory is “managed by planners” and that belief is incorrect. Inventory is managed by a decision system, a complex interaction of rules embedded in ERP and planning tools. Those tools process replenishment logic, safety stock formulas, lot sizing rules, planning horizons, override behaviors and exception handling policies. (Note that I do not insinuate that these rules are set up efficiently or even correct)

Planners do not design these rules. They execute them, react to their outputs, and apply judgment under pressure. In effect, planners are operating a machine whose internal logic they do not control and rarely understand. The result is predictable:

·       Shortages trigger panic buying

·       Panic buying creates excess

·       Excess drives inventory reduction initiatives

·       Reduction initiatives collapse service

·       The cycle repeats

Many planners are highly experienced, dedicated professionals. But experience alone does not confer understanding of dynamic systems. Planning systems are not calculators. They are feedback systems with time delays, non-linear effects, amplification loops like the bullwhip effect and hidden state variables (pipeline inventory, WIP, backlog).

In such systems, well-intended local decisions routinely create global harm. Without explicit rules and guardrails, human judgment, especially under urgency and pressure from the boss, injects noise rather than control. This is not a training gap. It is a design failure.

Why do CFOs and COOs allow this to persist? Because from the top, the system appears rational:

·       Forecasts look quantitative

·       Parameters look precise

·       ERP outputs look deterministic

·       KPIs look controlled

But beneath the surface:

·       Parameters encode opinions

·       Overrides accumulate silently

·       Accountability is diffuse

·       Root causes are invisible

Finance measures inventory. Operations react to it. IT maintains the system. No one owns the decision logic itself. Imagine allowing junior staff to place hundreds of millions of dollars in treasury trades, without documented rules, limits, or governance. No company would tolerate that. Yet this is exactly how inventory is managed today.

To solve this problem we must look at inventory as capital allocation. The most important shift is linguistic and conceptual: Inventory is not an outcome - Inventory is capital allocation executed through a decision system. Once this is acknowledged, the right questions emerge:

·       What rules currently allocate our working capital?

·       Were those rules designed - or did they evolve accidentally?

·       Do they behave predictably under volatility?

·       Who owns them?

·       Who governs changes?

In most organizations, these questions have never been asked. The solution is not “better planners” but explicit decision governance. This means:

·       Separating decision rules from execution

·       Making rules visible, documented, and testable

·       Assigning executive ownership to decision logic

·       Holding leaders accountable for rule quality, not just outcomes

·       Allowing planners to manage exceptions - not compensate for system flaws

When decision rules are explicit, inventory becomes predictable. When inventory is predictable, service improves, cash stabilizes, and firefighting stops.

And here is a question every CFO and COO should ask: “Can anyone in this company explain, clearly and concisely, why our inventory behaves the way it does?”. If the answer is no, the company is not managing inventory. It is hoping the system behaves.

The most dangerous thing about poor inventory management is not excess stock or shortages. It is the illusion of control. Until companies treat inventory decision rules as the strategic, capital-allocating instruments they truly are, they will continue to entrust hundreds of millions of dollars to unmanaged systems and wonder why the results never materialize.

This is not a planner problem. It is a leadership problem.

And it can be solved.