What Is Speculative Inventory?
by Cam Merritt
A company's inventory is the goods it has available for resale. For a retail store, for example, inventory is simply the store's stock. For a home builder, inventory is the houses it has completed or nearly completed but hasn't yet sold. For a manufacturer, inventory includes both finished goods ready for sale and "work in process" -- products still being assembled. All inventory comes at a cost to the business: A retailer buys from a producer or wholesaler, for example, while a manufacturer has to buy materials and pay workers to assemble goods.
In its most common use, speculative inventory refers to goods purchased as a hedge against rising inventory costs. Say you own a hardware store, and you sell 50 hammers a month. You typically get hammers from a wholesaler for $5 apiece, but you have reason to believe the wholesale cost is going to rise. So the next time you'll order hammers, instead of ordering a month's worth, you order two years' worth to lock in the lower price. You don't need 1,200 hammers right now, but you think you will in the future; thus, those hammers are speculative inventory. Similarly, a manufacturer who anticipates an increase in the price of raw materials -- particularly one that can't be passed along to price-sensitive customers -- might ramp up production now while costs are lower. The output is speculative inventory.
Just as a business might load up on spec inventory to delay the impact of higher costs, it might also do so to prolong the benefit of temporary lower costs. Think about a consumer who buys gift wrap, Christmas decorations and other holiday items in January, when they've been marked down 75 percent or
more. That consumer is really just laying in speculative inventory. Businesses do likewise. When the cost of raw materials drops, a manufacturer may buy extra amounts to lock in the price savings. When a wholesaler goes out of business and sells off stock at a discount, retailers may swoop in and buy up far more than they need to meet current demand.
Businesses try to anticipate the level of demand for their products and then ensure that they have enough inventory to meet that demand. And it's common practice to maintain a certain amount of extra inventory to satisfy unexpected spikes in demand, as no business wants to run out of stock and have to turn away customers. This extra inventory sometimes gets referred to as speculative inventory, though it's more commonly known as buffer stock. However, if a company is acquiring extra inventory specifically in anticipation of a future increase in demand -- one that may or may not materialize -- "speculative inventory" certainly fits the situation. When a retailer begins selling a totally new product, one for which demand can only be projected, you could argue that its entire stock of that product is speculative inventory.
Speculative inventory has its own costs. A store that buys months' or years' worth of extra products has to store them somewhere, and it may have to pay for the space. Spec inventory can be stolen or damaged. Obsolescence is also a danger. A store that sells athletic shoes could theoretically lock in low prices by buying five years' worth of shoes at a time. But if styles change -- and they do, rapidly -- that spec inventory can wind up worthless. Companies have to weigh these costs and potential costs against the savings offered.