Mainstream Inventory Theories — Brian Romanchuk

If we look at standard macro Dynamic Stochastic General Equilibrium models, inventories do not appear. The modelling focus is on expectation formation – particularly in the household sector – and business sector behavior is stylised. Since the assumption is that products are bought and sold both spot and forward in an optimal fashion, production decisions are just set to give exactly the output needed in the spot market....

This assumes a "just-in-time" supply chain, which is an ideal that business shoot for, since carrying inventory involves charges. However, it is an unrealized ideal and given global supply chains it is probably unrealizable. The reality is planning, which is one of of the chief functions of organization  and management.

The differences between the mainstream approaches and the post-Keynesian perspective can be summarised as the difference between randomness and uncertainty. The mainstream approach is based on the assumption that firms are acting in an optimal fashion in the presence of (unknown) random outcomes – that are described by a known probability distribution. The post-Keynesian approach underlines the importance of fundamental uncertainty – we have no idea what the probability distribution is. As a result, decision-making operates in a fog of uncertainty. From a post-Keynesian perspective, holding inventories is no “mystery”: firms cannot be certain what will happen in the coming months, so stockpiling key inputs and/or produced goods reduces the risks associated with adverse outcomes. As a result, even though it is accepted that firms certainly make plans, they are not blindly following the output of some optimisation. The straightforward way to get a grip on inventory management is to survey managers in industries to see what criteria they use to set target inventories. However, one risks drowning in micro data, and so we probably end up backing out simple macro relationships that match observed data in some sense....

Bond Economics
Mainstream Inventory Theories
Brian Romanchuk