Managing Service Inventory to Improve Performance

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The practice of pushing product by building inventory in anticipation of demand has fallen out of favor in recent years. Many companies prefer to build product only in response to actual demand. This permits firms to avoid costly supply and demand mismatches. Given how successful product-based firms have been with this approach, it is only natural to wonder how it would apply to service firms. Some argue that services cannot be inventoried. Yet this view relies on an extremely narrow definition of inventory as finished product waiting for customers. In practice, the authors say, inventory also serves as a way to store work that functions as "service inventory."

As with physical inventories, service inventories allow firms to buffer their resources from the variability of demand and reap benefits from economies of scale while benefiting customers. By using the correct form of service inventory, companies have the opportunity to offer better quality, faster response times and more competitive pricing. Using examples from the travel, hospitality and insurance industries, the authors discuss how service firms can use inventory as a strategic lever in designing and managing service offerings.

Sunil Chopra is IBM Distinguished Professor of Operations Management at the Kellogg School of Management, Northwestern University, Evanston, Illinois. Martin A. Lariviere, also at the Kellogg School, is associate professor of managerial economics and decision sciences. Contact them at s-chopra@northwestern.edu and m-lariviere@northwestern.edu.

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