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Back to the 70s

Sometimes, ideas can persist for years after their economic justification has vanished. For example, staff bonuses in finance were sensible in an era when partners in stockbrokers and merchant banks needed them to stabilise their incomes, but they became dangerous when they incentivised risk-taking. And fiscal austerity was defensible in an era of high interest rates, but is less so in a world of negative rates and a safe asset shortage.

The same might now to be true of companies’ attitudes to inventories. Supply disruptions caused by a lack of parts or difficulties in finding HGV drivers highlight the dangers of having low inventories.

But how did we get here? Part of the story is that from the 1980s onwards, information technology allowed firms to better control stocks, giving rise to just-in-time production. IT, however, was only an enabler. There were two economic forces behind the long-term fall in inventories.

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