Why we need to rethink inventory, especially in New Zealand

For a long time, businesses pushed supply chain professionals to treat inventory as a problem. Lean supply chains were the goal: keep stock levels low, move goods quickly, and reduce waste. This approach made sense whenglobal supply networks were relatively stable and predictable.

In recent years, however, that predictability has disappeared. Disruptions have become more frequent and harder to anticipate. The COVID-19 pandemic exposed deep vulnerabilities in global sourcing. Since then, geopolitical tensions, climate-related events, and transport delays have shown just how easily finely tuned systems can break.

New Zealand offers a clear example of how fragile supply chains can become. In 2023, the country experienced a significant shortage of industrial CO₂, which affected beverage and food production. The immediate cause was the partial shutdown of the country’s only major domestic source, the Kapuni plant, which captures CO₂ as a by-product of fertiliser production. Technical issues at the plant, combined with global supply constraints and difficulties sourcing CO₂ from overseas, created a perfect storm (The Guardian, 26 January 2023; NZ Herald, 27 February 2023). A mix of domestic production challenges and limited global alternatives revealed the risks of having littl slack in the system.

Inventory is one of several levers firms can use to manage such uncertainty. Other strategies include increasing production capacity, diversifying supply sources, or working with closer or more reliable suppliers. But these options are not always feasible, especially for firms operating in geographically remote regions like New Zealand. In those cases, inventory becomes the most flexible buffer.

As supply chains have become more uncertain, many businesses have responded by increasing their inventory levels. Across sectors, firms are holding more stock not because demand has surged, but to buffer against potential disruption. While some indicators, such as the inventory-to-sales ratio in manufacturing and wholesale, have risen in recent years, retail inventory levels in the US have not recovered to pre-pandemic levels. These trends vary by sector and may reflect structural shifts such as vendor-managed inventory, demand volatility, or changes in cost of goods sold (WSJ, 2024; McKinsey & Company, 2024).

While keeping more inventory can help manage risk, it also introduces real trade-offs. Holding stock ties up working capital, requires warehouse space, and increases the risk of spoilage or obsolescence. These are known as holding costs. Conversely, placing frequent small orders can lead to higher ordering costs, due to increased administrative and transport overheads. And when stock runs out, firms face stockout costs in the form of lost sales, customer dissatisfaction, or production delays. Managing inventory well means balancing these three types of costs. Too little stock leads to service failures. Too much stock creates waste. Ordering too often adds friction to the system.

This balancing act becomes even more complex when the supply side is unreliable. Supply uncertainty can take many forms, including variable lead times, delayed shipments, and inconsistent supplier performance. These issues make it harder to predict when stock will arrive and in what quantity, complicating inventory planning even when demand is stable.

One increasingly common issue, particularly when disruptions constrain capacity, is supplier rationing. In these situations, suppliers are unable to fulfil the full quantity that each customer orders and instead allocate a fraction of available stock to each buyer. From the buyer’s perspective, this results in a random yield: the actual amount received depends on but varies from the quantity ordered. This added layer of uncertainty increases the risk of both overstocking and stockouts, and requires new ways of thinking about how much to order and when.

Together with my colleague Jan Van Mieghem (Northwestern  University), I am currently studying this problem in detail. In our working paper, Sourcing with Random Yields: Operational Hedging and Optimal Policies, we explore how firms can adjust their inventory strategies under these conditions (SSRN, 2025).

Inventory is no longer just an operational concern. It is a key part of how businesses build resilience. In a world where disruption is a
constant feature, inventory becomes one of the few levers firms can actively
manage.

This is especially important for New Zealand. As a geographically remote and trade-dependent country, it is particularly exposed to global volatility. Smarter, more adaptive inventory strategies will be essential in the years ahead.

It is time to move beyond the old assumption that inventory is a weakness. When managed well, it becomes a strength. It creates flexibility, buffers risk, and allows firms to respond rather than react.

Dr Riccardo Mogre is Associate Professor of Supply  Chain Management at Durham University Business School, and an External Member of the Centre for Supply Chain Management at the University of Auckland Business School.  He can be contacted at riccardo.mogre@durham.ac.uk.