How On-Demand Manufacturing Impacts Inventory Carrying Costs

The benefits of overstocking don’t outweigh the mounting drawbacks of storing excess stock, but what can you do about it? As it turns out, you can do a great deal. By adopting on-demand manufacturing strategies, you can minimize inventory carrying costs without compromising lead times or customer satisfaction.

The Problem with Traditional Supply Chain Strategies

Overstocking and stockouts are relatively common among traditional supply chains, even those equipped with the latest tracking and demand forecasting technologies. As a result, most manufacturers’ inventory carrying costs range from 20% to 30% on average. As inflation and delays continue to put pressure on businesses, these percentages are expected to rise.

For decades, companies have accepted the fact that incurring expenses for storing unsold products is unavoidable. After all, no better alternative exists. Where would they store their goods? This logic is sound but flawed. It frames the supply chain as static, when in reality it is ever-changing.

The traditional product flow moves through order processing, production, warehousing and distribution. Manufacturing takes up the bulk of the time, with lead times typically ranging from seven to 30 days in certain sectors. Additive manufacturing tools like three-dimensional printers enable on-demand manufacturing, condensing this timeline.

Ensuring a consistent flow of goods can help keep costs low, but this strategy makes organizations vulnerable to supply chain disruptions and demand volatility. Rather than focusing on streamlining operations, they can adopt a just-in-time manufacturing strategy. The best way to decrease holding costs is to minimize the amount of unsold inventory being stored.

The Importance of Decreasing Inventory Carrying Costs

Storing unsold inventory is becoming increasingly expensive. According to the CEO of the Council of Supply Chain Management Professionals Mark Baxa, carrying costs are continuously rising, driven by inflationary pressure and supply chain disruptions. This signals a growing sales risk and margin pressure.

While technologies like artificial intelligence simplify demand forecasting, people move on from trends quickly and without warning, often rendering unsold stock obsolete. Damage, theft and spoilage can also occur, causing preventable losses.

Warehouse rent is another component. Although many high-priced leases signed during COVID-19 are starting to expire, costs remain high due to a lack of available space. One projection states an industrial lease will cost almost 75% more in 2025 than it did in 2015. The only reliable way to lower this line item is to reduce the amount of inventory you store.

Even if your expenses are below average, you likely have places where you can tighten up spending to secure hidden cost savings. For reference, inefficient inventory management results in approximately $1.1 trillion in losses globally. Instead of playing guessing games with consumer demand, you should produce goods on request.

How On-Demand Manufacturing Impacts Carrying Costs

Practicing on-demand manufacturing means you receive materials and produce goods as necessary based on current demand, not forecasts. You decrease the expenses associated with storing and managing inventory. Producing to order means there is no risk of inventory becoming damaged, spoiled or outdated, which is a major component of carrying costs.

In addition to reducing overstock, this approach dramatically decreases storage expenses by maintaining a minimal inventory. Requiring less space means you lower your warehouse rent, free up capital tied in stock, optimize labor costs and lower product losses associated with theft or damage. Overall, you see greater savings in most aspects of inventory management.

On-demand production addresses each core inventory expense component—capital, storage, service and risk. Research indicates it can reduce holding costs and improve supply chain efficiency by mitigating demand volatility. Rather than worrying about clearing out old stock, you can focus on the present.

Adopting just-in-time strategies can be financially beneficial, but you must be able to pivot quickly and respond to changes effectively. Doing so may involve modernizing your technology stack or overhauling the entire product development process.

Tips on Developing On-Demand Manufacturing Strategies

Successfully transitioning from traditional to just-in-time manufacturing requires more than a decision. Business leaders must carefully plan technology and partnerships. Their relationship with suppliers is particularly crucial because communication efficiency has downstream impacts.

To succeed, they must go beyond a simple transactional agreement. A vertical joint venture is a legal business arrangement between two entities within a supply chain. They combine assets, capital and skills to streamline operations and reduce costs. Since the agreement lasts for a predetermined duration, the contract must specify clear timelines and renewal terms.

Beyond establishing formal business or legal frameworks to integrate operations, companies should overhaul their technology stack. On-demand production is reactive, so fulfillment errors can be costly, and customers may lose trust in the brand. Intelligent automation technology can provide the visibility they need to bridge remaining gaps.

This approach requires a significant up-front investment, but positive returns are likely. Organizations leveraging AI report reducing transportation costs by 20% by lowering fuel use and mitigating vehicle wear and tear. This technology can also support intelligent inventory management by analyzing historical data and current trends.

Improving Outcomes with Just-in-Time Manufacturing

As a supply chain professional, you are accustomed to dealing with events outside of your control. Instead of rushing to find last-minute workarounds when issues arise, you can fulfill orders as they are placed. Switching to an on-demand production approach lets you respond to the current state of the market and supply chain rather than operating on guesstimates.